MARC Ratings has affirmed its ratings of MARC-1_IS/AA-_IS on port operator Johor Port Berhad’s (JPB) Islamic Commercial Papers (ICP) Programme and Islamic Medium-Term Notes (IMTN) Programme with a combined limit of RM1.0 billion. The long-term rating carries a stable outlook. The outstanding under the programme is RM600 million IMTNs. The company operates Johor Port, a gateway port in Pasir Gudang, under a concession agreement expiring on March 23, 2055. 

The ratings affirmation is mainly driven by JPB’s lengthy track record as the operator of the key gateway port in southern Malaysia, underpinned by steady throughput volume that has enabled strong operating cash flow generation. The key moderating factor to the rating is exposure to the vagaries of regional economic and trade activities.

The port operator has continued to perform within expectations, benefitting from the full-year implementation of the port tariff hike in October 2021. Revenue grew 16.0% y-o-y to RM675.2 million in 2022 on higher conventional cargo of 19.06 million freight weight tonnes (FWT) and marginally lower containerised cargo of 918,598 twenty-foot equivalent units (TEUs) (2021: 18.38 million FWT; 937,206 TEUs). This translated to a utilisation rate of 79.4% and 63.4%. The higher conventional cargo volume was mainly driven by dry bulk cargo including palm kernel seeds and copper concentrates. The container handling volume was affected by some changes in global shipping routes due to the ongoing Russia-Ukraine conflict. Operating profit margin has been steady at around 40%. Over the near term, overall throughput volumes for conventional and container cargo are expected to remain largely in line with the performance in 2022, in view of the slower trade growth momentum.

JPB is undertaking structural improvements to its conventional terminal and expanding its liquid jetty in 2024, at a cost amounting to RM340 million of the total planned capex of RM760 million through 2027. To partly fund the capex, JPB will increase its borrowings to RM800 million from the RM600 million (fully comprised of sukuk) in 1Q2023. Accordingly, leverage is projected to increase to 0.68x in the next two years. The capex spending is in line with planned capex, although JPB retains the flexibility to defer capex plans depending on expected throughput volumes.

Cash flow from operations (CFO) of RM295.6 million translated to stronger CFO interest and debt coverages of 9.51x and 0.35x in 2022 on account of lower borrowings.  CFO is expected to remain strong on the back of a healthy earnings before interest, taxes, depreciation and amortisation (EBITDA) margin of about 55%. JPB does not have near-term borrowings maturity with the first IMTN coming due only in 2027.

JPB is one of the key dividend contributors to parent MMC Port Holdings Sdn Bhd (MMC Port) with an average annual payout of about RM110 million over the last five years. Coupled with the capex in 2024, free cash flow (FCF) is projected to be negative in FY2024, however, but would return to positive in the following financial year. We expect the company to maintain a balance between dividend distribution and its operational and financial requirements. We note that there is no requirement for capital dredging to date except in the area with the planned new liquid jetty. The next maintenance dredging, estimated to cost RM38 million, is scheduled to take place in 2026. Typically, maintenance dredging is carried out every four years.

The stable rating outlook reflects our expectations that JPB would broadly maintain its credit profile within the current levels over the next 12 months.

Any upgrade would stem from sustained earnings performance and improvement in balance sheet structure, in particular lowering leverage position to below 0.5x.

The ratings could come under pressure if performance were to deteriorate from expectations and/or if leverage were to rise sharply along with substantial dividend payout that would weaken liquidity.