MARC AFFIRMS AAAID(S) RATING ON KUCHING PORT AUTHORITY’S RM180.0 MILLION BaIDS

Nov 26, 2013 -

MARC has affirmed its AAAID(S) rating on Kuching Port Authority’s (KPA) RM180.0 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) with a stable outlook. The rating of KPA benefits from state support and is aligned to MARC’s public information rating on the Sarawak State Government (SSG) of AAA/Stable. KPA is the operator of Kuching Port.

MARC’s assessment of high probability of support from the SSG reflects the latter’s continuing commitment under a letter of support extended by the state government for the BaIDS to ensure that the port authority remains current on the rated obligations. MARC regards KPA’s financing flexibility as an important rating driver given the port authority has been drawing upon its committed revolving credit lines under the BaIDS financing structure to cover shortfalls in its internally generated funds against scheduled BaIDS redemptions. In this regard, the rating agency believes that KPA’s access to bank financing and refinancing capacity will continue to benefit from port authority’s status as state-owned statutory body and high implicit support from the SSG.

MARC’s public information rating on the SSG of AAA/Stable reflects Sarawak’s strong economy, its solid track record of prudent fiscal management, financial flexibility, moderate debt burden and continued close relationship between the federal and the state government. The stable rating outlook, meanwhile, reflects a supportive political and economic environment, as well as continued budgetary conservatism.

The state’s economy is estimated to have expanded by 4.5% in 2012 (2011: 4.2%). The state’s growth prospects remain good as domestic investments are supported by the implementation of projects under the Sarawak Corridor of Renewable Energy (SCORE) and Economic Transformation Programme (ETP). The state’s tax generating capacity maintained an uptrend in 2012 and Sarawak continued to demonstrate a conservative approach to fiscal management. The state has consistently run a fiscal surplus. In 2011, the state posted a fiscal surplus of RM2.6 billion, up from RM2.2 billion for 2010.

Sarawak’s debt levels have remained low in relation to revenues as a result of the state’s well-controlled capital expenditure. Sarawak’s public debt stood at RM2.2 billion as at end-2011, which is amply supported by its revenue and economic base. State debt was 33.6% of revenue and 4.2% of GDP in 2011. Continuing favourable federal-state relations remain a positive rating factor in the context of Sarawak’s reliance on federal spending. In 2011, Sarawak received RM120.8 million in loans from the federal government to finance its capital requirements.

On a stand-alone basis, KPA’s credit profile is characterised by its low profitability and tight liquidity position. KPA’s port tariff structure has remained unchanged since MARC’s last review in November 2012. The port handled 9.1 million tonnes of cargo in 2012, up 7.4% from 2011, producing revenues and operating profit of RM60.0 million and RM20.7 million respectively, both up 8.7% from 2011. Since 2010, KPA maintained an uptrend in its cargo throughput unlike average revenue per tonne of cargo handled which has been on a downtrend since 2010. Containers continued to be the primary cargo moved through the port, mainly imports for domestic consumption. Consequently, the KPA’s cargo throughput is sensitive to the state’s economic growth and consumer spending power.

KPA’s pre-tax profit rose to RM10.6 million in 2012 (2011: RM7.9 million) supported by decreasing borrowing costs. Despite improvements in KPA’s earnings, its cash flow has not kept pace and the authority continued to encounter cash flow shortfalls in relation to its debt servicing requirements. In 2012, KPA utilised RM12.0 million from its credit facilities to redeem RM30.0 million of its BaIDS, with the balance coming from its internally generated cash flow from operations. Its full year cash flow from operations (CFO) came to RM29.3 million (2011: RM28.1 million). For the seven-month period ended July 31, 2013 (7M2013), KPA’s revenue and pre-tax profit were RM32.6 million and RM8.0 million respectively on the back of higher total cargo throughput of 5.56 million tonnes compared to 5.15 million tonnes of total cargo handled in the previous corresponding period. Despite improved operating profit, KPA’s CFO and free cash flow were slightly lower than 7M2012’s figures at RM17.8 million and RM17.6 million respectively.

MARC notes KPA’s continuing reliance on revolving credit lines since 2010 to provide a liquidity buffer against shortfalls in its internally generated funds and to address its increasing repayments on the BaIDs. KPA has an upcoming profit and principal repayment of RM33.2 million on December 27, 2013. KPA’s financing flexibility continues to benefit significantly from the committed standby credit lines. SSG continues to ensure that the port authority has sufficient access to bank lines to cover shortfalls in cash flows and meet its repayments on the BaIDS. KPA’s unutilised credit facilities totalled RM51.0 million as of July 31, 2013.

The rating outlook on the BaIDS is aligned to that on the Sarawak state public information rating. Any changes in the rating and/or outlook would mainly be driven by a revision of the credit rating of the state of Sarawak and/or a weakening of SSG’s support.

Contacts:

Koh Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my;

David Lee, +603-2082 2255/ david@marc.com.my.