NORTHPORT (MALAYSIA) BHD - 2016

MARC has affirmed its MARC-1_IS and AA-_IS ratings on Northport (Malaysia) Bhd’s (Northport) Islamic Commercial Papers (ICP) Programme and Islamic Medium-Term Notes (IMTN) Programme respectively (collectively Sukuk Musharakah Programmes). The outlook on the ratings is stable. The ratings affect the outstanding amount of RM350 million as at December 31, 2016 under the rated programmes which have a combined limit of RM1.5 billion.

The affirmed ratings incorporate Northport’s position as a key domestic port operator, its adequate credit metrics for its rating bands and strong operational efficiency. Moderating the ratings are capacity constraints at Northport, strengthening competition from other ports, and subdued global trade growth. Additionally, MARC remains concerned over Northport’s limited free cash flow generation arising from increasing capital expenditure (capex) requirements and dividend payout.

Northport operates two ports situated at North Port and Southpoint in Port Klang. It currently operates under an interim privatisation agreement with the government and Port Klang Authority for a period of 30 years until November 30, 2043. Northport offers mainly container services via North Port and conventional cargo handling services via Southpoint. Following the completion of the acquisition of Northport’s holding company NCB Holdings Bhd (NCB) by MMC Corporation Berhad (MMC) through MMC Port Holdings Sdn Bhd (MMC Port) in December 2015, Northport’s business processes have been streamlined through realisation of cost and operational synergies.

MARC notes the improvement in Northport’s container terminal utilisation rate to 56.1% in the first seven months of 2016 (7M2016) from 48.5% in the previous corresponding period. MMC has also outlined a development plan on Southpoint while upgrading works on Northport’s Wharf 8 are ongoing and expected to be completed in August 2017. The rating agency views the capex upgrades as vital to strengthening Northport’s market position in the long run. However, to support its development plans, borrowings are expected to increase which could weaken its debt servicing capacity in the near term.

The port’s container business, the main contributor of operational revenue, recorded a 15.6% year-on-year (y-o-y) increase in containers handled of 1.832 million twenty foot equivalent units (TEU) in 7M2016 (7M2015: 1.585 million TEUs). The increase, which was partly a result of the commencement of its new wharf 8A operations in November 2014, led to a corresponding 15% y-o-y growth in revenue to RM391.1 million in 7M2016 (7M2015: RM340.1 million). Cost synergies have led to better operating profit before interest, tax, depreciation and amortisation (OPBITDA) and operating profit margins of 32.9% and 19.9% respectively in 7M2016 (7M2015: 30%; 15.1%). Despite an increase in Northport’s cash from operations (CFO) to RM128.0 million in 7M2016, free cash flow returned to a deficit of RM5.2 million stemming from an increase in capex amounting to RM73.2 million and higher dividends upstreamed of RM60.0 million (7M2015: capex: RM23 million; dividend payout: RM10 million).

MARC believes strong liquidity and leverage positions will be key in supporting the company’s growth plans. Timely execution of the port’s expansion plans is also critical to the overall cost positioning of its operations. The port operator is expected to incur over RM823 million in capex over the next three years for equipment replacement and rehabilitation of existing infrastructure. As at July 31, 2016, Northport’s interim finance-to-equity ratio (FER) stood at 0.35 times (7M2015: 0.33 times). Assuming the company further draws down an additional RM300 million, Northport’s pro forma FER and debt-to-OPBITDA are expected to increase to 0.61 times and 3.49 times respectively. Northport has an undrawn facility of RM1.15 billion under the RM1.5 billion Sukuk Musharakah programme to date.

The stable outlook reflects MARC’s expectations that the impact from synergies within the MMC Port group will contribute positively to Northport’s operating performance. Downward pressure on the ratings may occur if there is a cash flow generation mismatch with its debt leading to the company's debt-to-OPBITDA rising beyond 3.5 times, OPBITDA return on assets declining below 7.5% and/or CFO debt coverage falling below 0.5 times.

Major Rating Factors

Strengths

• A key port operator in Malaysia;
• Strong operational efficiency; and
• Revenue and cost synergies post acquisition.

Challenges/ Risks

• Aggressive capital spending and dividend policy;
• Strengthening competitive position and securing new client base; and
• Current capacity constraint may limit growth.