MARC ASSIGNS PRELIMINARY RATINGS OF MARC-1IS/AA-IS TO NORTHPORT (MALAYSIA) BERHAD’S SUKUK MUSHARAKAH PROGRAMMES OF UP TO RM1.5 BILLION; OUTLOOK STABLE

MARC has assigned preliminary ratings of MARC-1_IS and AA-_IS to port operator Northport (Malaysia) Bhd’s (NMB) Islamic Commercial Papers (ICP) Programme and Islamic Medium-Term Notes (IMTN) Programme respectively (collectively known as Sukuk Musharakah Programmes) with a joint limit of up to RM1.5 billion. The outlook on the ratings is stable. The ratings incorporate NMB’s strategic importance as one of the key trade gateways in Malaysia, its fairly integrated port services at Port Klang, and its cash flow generation ability mainly through container handling services. Moderating the ratings are NMB’s business growth prospects that have been hampered by infrastructure constraints and challenging conditions in the shipping industry. The ratings also factor in NMB’s fairly large capital expenditure programme that will further weigh on its financial metrics in the near to medium term. 

Operating two ports under concessions, namely North Port and South Port, NMB has benefitted from the ports’ strategic position on the Straits of Malacca shipping route and their close proximity to industrial hubs in the Klang Valley. MARC notes that the original concessions had expired in November 2013. Pending finalisation of a new concession agreement, NMB is currently operating the ports under an interim privatisation agreement with the government. MARC considers the non-renewal risk to be low given the port operator’s longstanding and satisfactory operating track record. Of the two ports, North Port is larger and more important, providing container handling services with a combined capacity of 5.6 million twenty-foot equivalent units (TEUs) while South Port offers conventional cargo handling services with a capacity of 4.1 million freight weight tonnes (FWTs). NMB’s market strength is reflected in its share of about 60% and 45% of the country’s imports and exports respectively. Serving more than 123 shipping lines, mainly from the intra-Asia region, NMB has maintained an average crane efficiency of 30 moves per hour compared to the industry average of 25 moves per hour.

NMB’s container handling business growth has been hindered by infrastructure constraints to accommodate ultra-large vessels requiring drafts and lengths of more than 15 metres and 350 metres respectively. In addition, North Port has limited container handling capacity as compared to its domestic and regional competitors. These constraints are expected to be addressed by NMB’s ongoing implementation of a five-phase development plan between 2012 and 2022 which MARC views as key to arresting the decline in the port operator’s competitive position in attracting large shipping companies. The first phase to deepen North Port’s harbour to 15 metres, increase container handling capacity by 600,000 TEUs and lengthen the quay to 350 metres was completed in end-2013. The remaining development phases will include an upgrade of North Port’s wharves, replacing key operating equipments and increase in the container handling capacity to 6.3 million TEUs. Notwithstanding the ongoing measures, MARC believes that NMB will continue to face intense competition from other port operators such as Westports Malaysia Sdn Bhd, Port of Tanjung Pelepas Sdn Bhd and PSA International Pte Ltd. NMB’s long-term relationships with its main clients coupled with its favourable operational efficiency could mitigate the risk of major liners shifting to its peers. 

For 2013, revenue from the container handling services segment, which accounted for 67.5% of total revenue (2012: 71.8%), continued to decline to RM427.7 million (2012: RM476.5 million). For 1H2014, NMB registered a 14.0% year-on-year decrease in revenue to RM270.7 million (1H2013: RM314.8 million) due to a sharp decrease in container throughput volume and vessel calls from a major client, A.P. Moller-Maersk Group. Notwithstanding this, MARC takes comfort from the overall improvement of container throughput volume from NMB’s other clients in 1H2014. Since commencing the capex programme in 2012, NMB has continued to register negative free cash flows (FCF). MARC expects the company’s FCF to turn positive only from 2017 onwards following the end of heavy capital spending in the first three years of the Sukuk Musharakah Programmes. As at June 30, 2014, NMB has low borrowings of RM57 million, but given the sizeable projected capex of RM2.7 billion over the tenure of the Sukuk Musharakah Programmes, total debt is expected to increase with cumulative proceeds of RM1.5 billion under the rated programmes. In view of the impending increase in debt, MARC expects NMB to adopt a more moderate dividend policy to maintain balance sheet strength.

NMB’s cash flow projection illustrates a minimum and average finance service cover ratio (FSCR) of 2.51 times and 16.92 times respectively. The finance-to-equity ratio (FER) is expected to peak at 1.26 times in 2020 which is well within the covenanted FER of 1.75 times. Based on MARC’s sensitivity analysis, NMB’s ability to meet its finance service obligations and maintain a FSCR above the covenanted level of 1.50 times is highly dependent on the performance of its container handling services segment in the early tenure of the Sukuk Musharakah Programmes. NMB is susceptible to liquidity shortfall for its debt obligations in 2017 should the container handling services segment experience zero container throughput volume growth in 2015. However, this liquidity risk may be moderated by the company’s ability to defer its discretionary capital expenditure and/or adjust its issuance schedule under the rated programmes.

The stable outlook reflects MARC’s expectations that NMB would maintain its credit profile, supported by an adequate liquidity buffer against any lower-than-expected revenue growth. Downward ratings pressure could be triggered by weakening financial metrics as a result of a declining container handling throughput and/or large dividend payouts.

Contacts: Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my.

November 19, 2014