Kuching Port Authority - 2014

MARC has affirmed its 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 and outlook are aligned to MARC’s public information rating on the Sarawak State Government (SSG) on the basis of KPA’s status as a state-owned statutory body and state support provided on the BaIDS. KPA, which is under the purview of the SSG, is the operator of Kuching Port. MARC has assessed a high probability of support from the SSG by taking into account the state government’s continuing commitment to KPA in accordance with the letter of support issued in respect of the BaIDS. In this regard, KPA is assured of access to bank credit facilities to cover any shortfalls to meet scheduled BaIDS redemptions. The financial flexibility afforded through the committed standby credit lines is regarded as an important rating driver in view of KPA’s modest cash flow generation and reliance on the facilities for the past four years to meet its financial obligations.

MARC’s public information rating of AAA/Stable on the SSG is underpinned by its relatively resilient economic growth, sustained strong financial performance, prudent leverage policy, and continuing economic and financial support from the federal government. Sarawak’s economic growth has been resilient, mainly due to its abundant natural resources which has contributed to its position as the second-richest state in Malaysia. With a per capita gross domestic product of RM40,414 in 2012, the state’s financial performance has been strong, largely supported by its oil and gas-related activities, which contributed an average of 34.5% towards state revenues over the past five years. In 2012, state revenues rose 8.5% year-on-year (y-o-y) to a seven-year high of RM7.2 billion. In addition, the state’s leverage policy has been prudent. The increase in Sarawak’s total borrowings has slowed down, while its debt-revenue ratio of 0.31 times (x) in 2012 is lower than some of its peers such as Selangor (0.46x) and Johor (0.43x). Additionally, contingent liabilities, arising from financial guarantees provided to its related entities, have also decreased, down by 46.8% y-o-y to RM305 million (2012).

Meanwhile, KPA’s standalone credit profile has demonstrated steady improvement over the years in line with its cargo throughput growth. In 2013, Kuching Port’s cargo throughput registered a 9.3% y-o-y growth to 9.98 million tonnes of cargo. However, revenue growth would be a marginal 1.9% y-o-y to RM61.1 million on adjusting contribution from container service charge as other income. The lower growth is partly on account of lower revenue per tonne. KPA’s higher operating profit together with lower financing costs resulted in an increase in pre-tax profit to RM13.5 million in 2013 (2012: RM10.6 million).

Nonetheless, KPA’s creditworthiness continues to be moderated by the authority’s tight liquidity position characterised by cash flow shortfalls in servicing its debt requirements despite stable earnings generated

from port operations. In addition to cash flow from operations (CFO) of RM29.7 million (2012: RM29.3 million), KPA utilised RM49.0 million from its credit facilities to meet a total debt obligation of RM78.3 million in 2013. In 2013, KPA’s debt-to-equity ratio improved to 1.74x (2012: 2.62x) as total borrowings declined to RM109.0 million (2012: RM129.0 million). KPA’s upcoming profit and principal repayments of RM32.1 million on December 26, 2014 are expected to be met partly by drawdowns from revolving credit and term loan facilities. As of July 31, 2014, KPA’s unutilised credit facilities totalled RM66.5 million while cash and cash equivalents stood at RM13.3 million.

Notwithstanding concerns over KPA’s weak liquidity, any downside risk in relation to KPA’s credit profile is mitigated by the state providing contingency arrangements of liquidity support throughout the remaining tenure of the BaIDS. Any changes in the rating and/or outlook would mainly be driven by a revision of the credit rating of the state of Sarawak and/or a weakening of SSG’s support.

Major Rating Factors

Strengths

• Statutory body status and strong support provided by the Sarawak state government; 
• Liquidity buffer provided by the availability of unutilised credit lines; and
• Relatively stable cargo throughput.

Challenges/Risks

• Port performance dependent on the general state of economy; and
• Reliance on credit lines to address cash shortfalls to meet debt servicing obligations.