MARC has affirmed its AA+IS rating on Westports Malaysia Sdn Bhd's (Westports) RM2.0 billion Sukuk Musyarakah Programme with a stable outlook.

The rating is driven by Westports' solid financial metrics as reflected by its stable operating margins and strong finance service coverage on the back of commendable operational performance. The rating also benefits from Westport's strong competitive position in transhipment in the region with a capacity to handle 12.5 million twenty-foot equivalent units (TEU) per annum. Moderating the rating are the group's exposure to a concentrated clientele base and to the vagaries of the shipping industry.

Westports has continued to invest in capacity expansion at its port in Port Klang, currently focusing on completing the construction of the second phase of Container Terminal 8 (CT8), the first phase of which added 1 million TEUs and was commissioned in May 2016. The second phase, which is expected to be fully completed by November 2017, involves constructing a 300m wharf that will add a further 0.5 million TEUs. The group has also commenced construction of phase one of CT9 which will add a 600m wharf; the construction has achieved 25% completion as at end-March 2017. MARC opines Westports' ongoing capacity expansion and upgrades are key strategies in enabling the port operator to maintain its competitive position in the container handling segment. The segment registered a throughput volume growth of 9.9% y-o-y to 9.95 million TEUs (2015:9.05 million TEUs), accounting for 40% of Malaysia's container market share in 2016.

MARC, however, views Westports' ability to repeat its 2016 growth performance as uncertain following CMA CGM's acquisition of Neptune Orient Lines, and United Arab Shipping Company's (UASC) merger with Hapag-Lloyd. CMA CGM and UASC, which are Westports' major clients, could move two million TEUs collectively from Westports to Port of Singapore Authority following the aforementioned consolidation. During the review period, CMA CGM and UASC contributed 34.0% and 11.8% respectively to Westports' container throughput. The resulting clientele mix will only become clearer by 3Q2017 upon finalisation of the two new major shipping alliances. In 2016, Westports recorded a lower average of 28 crane moves per hour (MPH) and higher average waiting time of 6.9 hours (2015: 29 MPH; 5 hours), which have been attributed to heavy congestion due to high traffic volume at the port. These issues are expected to be addressed through capacity expansion, which has been largely funded through internally generated funds.

In 2016, Westports' operational revenue rose by 12.5% year-on-year (y-o-y) to RM1.8 billion, driven by its container volume which accounted for 85% of operational revenue. The higher container handling throughput volume aided in improving Westports' operating profit and pre-tax profit to RM801.1 million and RM736.2 million respectively (2015: RM715.7 million; RM653.4 million). The port's operating profit margin remains strong, hovering at about 40% over the past five years. Cash flow from operations (CFO) increased to RM1,014.6 million (2015: RM688.6 million), mainly on the back of the container tariff revision implemented in November 2015.

The company's debt service metrics such as the CFO interest coverage and CFO debt coverage were robust at 18.0 times and 83.3% (2015: 12.2 times; 55%) respectively, supported by cash and cash equivalents of RM405.3 million as at end-2016 (end-2015: RM394.8 million). In line with its higher retained earnings, Westports' debt-to-equity ratio declined to 0.56 times (2015: 0.62 times). For 1Q2017, Westports' operational revenue rose slightly to RM438.6 million on the back of a marginal increase in Westports' container throughput volume to 2.43 million TEUs (1Q2016: RM436.3 million; 2.41 million TEUs). Westports' operating profit, however, showed a 5.6% y-o-y decline to RM195.4 million largely due to higher fuel costs.

The outlook on Westports remains stable on expectations that the port operator will continue to maintain its operational and financial metrics at current levels. Downward pressure on the rating may occur in the event of an erosion in its cash flow generation and leverage metrics resulting in the CFO debt coverage falling below 0.5 times, debt-to-OPBITDA rising above 2.5 times and/or debt-to-equity arising above 0.7 times.

Contacts: Adib Asilah, +603-2717 2943/ asilah@marc.com.my; David Lee, +603-2717 2955/ david@marc.com.my

June 8, 2017