CREDIT ANALYSIS REPORT

NORTHPORT (MALAYSIA) BERHAD - 2018

Report ID 5923 Popularity 1314 views 123 downloads 
Report Date Apr 2019 Product  
Company / Issuer Northport (Malaysia) Bhd Sector Infrastructure & Utilities - Port/Airport
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Rationale

MARC has affirmed its MARC-1IS and AA-IS ratings on Northport (Malaysia) Berhad’s (Northport) Islamic Commercial Papers (ICP) Programme and Islamic Medium-Term Notes (IMTN) Programme. The outlook on the ratings is stable. The rated programmes have a combined limit of RM1.5 billion and the outstanding under the programmes was RM450 million as at end-January 2019.

Northport is a port operator of two ports, North Port and Southpoint in Port Klang under long-term concessions expiring in November 2043. The affirmed ratings reflect Northport’s position as the operator of one of the key gateway ports along the Straits of Malacca and its adequate credit metrics that are broadly in line with the ratings. Moderating the ratings is the increasing pressure on Northport’s business operations arising from the ongoing changes in global shipping alliances that have resulted in a decline in its throughput volumes.

The stable outlook incorporates expectations that in light of weakened traffic volumes, Northport will undertake measures to shore up its financial performance which may include scaling back on dividend payouts and capex spending. The stable outlook is also supported by the impending upward revision of 15% on key container tariff items from March 2019 that would forestall a further weakening in the operating profit margin.

For 1H2018, Northport’s total container traffic volume declined by 12.7% y-o-y to 1.4 million TEUs, largely attributable to the recent consolidation of global shipping alliances which has led to a shift in ports of call. This is reflected in the contraction of Port Klang’s container volume by around 9% y-o-y in 2017. Northport’s group revenue declined by 11.8% y-o-y to RM308.3 million. Due to the high fixed cost of Northport’s operations, operating profit decreased to RM32.8 million (1H2017: RM70.6 million). As a result, the operating profit margin fell to 10.6% from 20.2% in 1H2017.

Northport has focused on improving operational efficiencies, among other measures, to counteract the impact from changes in the shipping alliances. Its port congestion as measured by the average waiting time declined to around 0.4 hours as at end-1H2018 (1H2017: 1.4 hours). The improvement was supported by the expansion of North Port’s wharf 8 capacity in August 2017. As a recent member of the MMC Group, Northport has also been able to leverage on port expertise within the group to reduce costs and strengthen its position as a regional distribution centre for manufacturers. The port operator is seeking to further increase its conventional cargo throughput volume which recorded a 5.1% y-o-y growth in 1H2018 that had partly offset the decline in container traffic volume.

The group has invested in the purchase of super post-Panamax quay cranes to strengthen container handling capabilities and services. This purchase amounting to about RM182 million constituted its main capex in 2018 and, for 2019, Northport has earmarked about RM319 million for land acquisition around the port and to develop infrastructure facilities. As a result, free cash flow (FCF) would remain under pressure; for 1H2018, FCF stood at negative RM66.8 million compared to negative RM146.5 million at end-2017, which was worsened by a sizeable dividend payout of RM298.0 million. MARC views a moderation in Northport’s dividend payouts in the current challenging operating environment would be key in supporting the port operator’s credit profile going forward.

Its capex was partly funded through proceeds from the issuance from the rated programme. Higher total borrowings of RM450 million resulting from an additional drawdown of RM100.0 million from the rated facilities saw the group’s finance-to-equity ratio (FER) increase to a moderate 0.53x (1H2017: 0.38x). Cash balance relative to total borrowings remained strong at RM234 million.

Major Rating Factors

Strengths

  • Key port operator;
  • Strategic location to capture intra-Asia trade flows;
  • Benefit from cost synergies as part of the MMC Group; and
  • Improving operational efficiency.

Challenges/Risks

  • Highly concentrated clientele base;
  • Declining operating margin; and
  • Growth weighed down by shift in global shipping alliances.
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