Kuching Port Authority - 2010

MARC has affirmed the 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 is aligned to MARC’s recently affirmed AAA/stable public information rating on the state of Sarawak. The BaIDS are rated at the same level as the Sarawak State Government (SSG) based on very high government support assumptions that derive from KPA’s status as a state-owned port authority and a letter from the SSG expressing support for KPA’s indebtedness under the BaIDS. Additionally, in the event of any shortfall in the minimum required balance of the debt service account (DSA), KPA is required to initiate a drawdown of funds under a committed RM27 million credit facility and/or issue a notice to the State Financial Secretary to enable the state government to effect a timely transfer of funds to the DSA prior to the BaIDS service due date. The RM27 million credit facility provided by CIMB Bank Berhad and MIDF Amanah Investment Bank Berhad has not been drawn at the date of this press release.

The rating on the state of Sarawak reflects its strong financial position, abundant natural resources, strong commitment to fiscal prudence, diversified economic structure and stable political environment. Sarawak continued to exhibit strong fiscal performance in 2008, reporting a healthy surplus of RM2.0 billion (2007: RM0.8 billion) riding on high commodity prices of crude oil, natural gas and palm oil. Prudent management of state expenses also contributed towards the state’s healthy fiscal performance. The higher debt level which saw the state’s outstanding borrowings increase to RM1.6 billion in 2008 from RM1.4 billion in 2007 is viewed as manageable as the ratio of state borrowings to state revenue is favourable at 0.25:1. The state was also able to settle all amounts due by year end, exhibiting its excellent liquidity position.

KPA, as the authority and operator of Kuching Port, is the first organised port in Sarawak to handle import and export activities of the state. As Kuching Port serves as the state’s port, its operations are highly susceptible to the state’s economic growth which was affected by the global economic downturn in 2009 where the state’s GDP growth moderated sharply from 1.6% in 2008 to 0.3% in 2009.

For the financial year ended December 31, 2009 (FY2009), revenue fell 9.9% to RM49.3 million due to the decrease in cargo throughput to 6.92 million tonnes from 7.55 million tonnes the year before. Containers handled dropped 6.3% year-on-year in 2009 to 161,091 TEUs (twenty-foot equivalent units) from the previous 171,943 TEUs, while vessel calls  dropped to 1,899 compared  to 2,190 in the previous year. Although KPA’s net profit fell to RM0.99 million (FY2008: RM1.3 million), the port authority’s operating profit margin increased slightly to 27.7% (RM2008: 26.7%) due to decrease in operations cost. MARC expects better profitability in FY2010 on account of expected higher cargo throughput and capacity utilisation of the port.

As a result of the decrease in cargo revenue, net cash generated from operating activities declined to RM7.1 million from RM13.3 million in the previous year. MARC notes that KPA’s net cash flow from operations continues to be insufficient to cover the debt repayment. However, this is mitigated by the state grant and its cash reserves. MARC estimates that KPA will be able to repay its BaIDS instalment of RM15 million in December 2010 by drawing down around RM7 million to RM8 million of its unutilised standby credit lines of RM27 million. Beyond 2010, MARC anticipates that KPA will likely rely on the financial support of the SSG to meet its increasingly heavy debt maturities.

The rating on the BaIDs would be affected by a change in the credit quality of the state of Sarawak, non-compliance with the payment mechanism for servicing the BaIDs and/or a weakening of SSG’s support.

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