Westports Malaysia Sdn Bhd - 2011

MARC has assigned a rating of AA+IS to Westports Malaysia Sdn Bhd’s (Westports) Sukuk Musyarakah (Sukuk) Programme of up to RM2.0 billion. At the same time, MARC has also affirmed its rating of AA+IS on Westports’ existing RM800 million Sukuk Musyarakah Medium Term Notes Programme, of which RM345 million is currently outstanding. The rating outlook for both issues is stable. The assigned rating incorporates Westports’ strong competitive position as one of two main container terminal operators in Port Klang with a 60% market share, robust cash flow generation ability supported by its track record of profitable operations and favourable operating efficiency. The rating considers the sensitivity of Westports’ earnings susceptibility to cyclical global trade conditions, the expected increases in its debt burden arising from capital expenditure commitments and concentrated customer base. The stable outlook reflects MARC’s expectations of proactive liquidity management and strong execution of Westports’ expansion plans in the near-to-intermediate term. It also reflects our positive view of the current dynamics of global trade.

The proceeds from the Sukuk issuances would be used to fund the company’s expansion plans and general working capital requirements. The container terminal operator is in the midst of a 10-year expansion plan that would add four new container terminals to its existing five, and increase its total container throughput capacity to 17.5 million twenty-foot-equivalent units (TEU) from 7.0 million TEU. Capital spending, which is projected to total RM4.1 billion over the 10-year period beginning in 2010, will be funded through its operational cash flow as well as borrowings. Drawdowns on the facility will be staggered from 2011 to 2016 and Westports’ debt-to-equity ratio is expected to peak at 0.94 times in FY2016 (FY2010: 0.35 times). MARC expects the privately held container terminal operator to show further meaningful improvements in its cash flow generation following the conclusion of its current phase of its investment programme by 2013. Additionally, MARC was made to understand that Westports maintains a reasonable degree of flexibility in managing the planned development and investment through to 2020. The flexibility to delay some capital expenditure as market conditions change moderates the risk of material weakening in Westports’ key debt protection measures, in particular debt service coverages and liquidity under less favourable market conditions. Assuming that Westports continues to be disciplined in managing its cash flow allocation, its cash generation as well as its capital and financing structure should be relatively resilient to downside scenarios.

MARC is mindful that Westports may face increased competition from other regional transhipment hubs such as the Port of Tanjung Pelepas and Singapore ports, which are also in the midst of expansion programmes. However, MARC believes that Westports’ strong operational track record should reduce the risk of losing important main line operators to other expanding regional ports. The port operator has been able to maintain its benchmark of 35 moves per crane-hour compared to the industry average of 25 moves per crane-hour. Its reputation as one of the most productive ports in the world has allowed Westports to secure two new main line operators, United Arab Shipping Agency and Mitsui OSK Line, as regular customers in FY2010, contributing to its increased container throughput. Despite its success in attracting new business, Westports’ customer concentration risks remain high with its largest customer accounting for 42% and 25% of container throughput and revenue respectively in FY2010. MARC cautions that any significant weakening in the credit profiles of its main customers would increase Westports’ accounts receivable risk and affect its balance sheet liquidity, though this risk appears manageable at present as indicated by the average collection period of less than 90 days.

Westports recorded a 17.0% and 21.1% increase in revenue and pre-tax profit to RM975.0 million and RM385.2 million respectively in FY2010 on the back of a recovery in global container throughput volumes. MARC notes that Westports has been able to maintain its strong margins during the downturn in FY2009, although the company has lowered its container handling rates and relaxed its credit terms to accommodate customers which were impacted by the slowdown in global container trade. At the same time, MARC notes that Westports’ shareholder-friendly dividend practices may reduce the extent to which the company is able to fund ongoing expansion through reinvestment of its operating cash flow. Westports paid out RM132.5 million in dividends in FY2010 (50% of FY2009 profit after tax) and intends to maintain a dividend payout ratio of 60% until 2013 and 75% thereafter. While some degree of protection is provided by financial covenants in the sukuk against minor shortfalls in liquidity and sharp increases in debt levels, MARC believes that Westports will need to maintain a strong liquidity position during the next several years to balance the increased risk associated with its higher leverage. Westports’ free cash flow is expected to be negative over the next two years. MARC expects Westports to be pro-active in managing its dividend policy and liquidity position to ensure its metrics remains generally consistent with its AA+IS rating. 

Major Rating Factors

Strengths

Challenges/Risks

• Capital-intensive expansionary programme;
• Port throughput sensitive to external trade trends; and
• Business concentration to key clients.