WESTPORTS MALAYSIA SDN BHD - 2019

MARC has affirmed its AA+_IS rating on Westports Malaysia Sdn Bhd’s (Westports) RM2.0 billion Sukuk Musharakah Programme with a stable outlook. Westports’ outstanding amount under the sukuk programme stood at RM1.5 billion as at June 25, 2019.

Westports’ strong position as a key port operator in the region, its consistently high and stable profit margin as well as strong financial service coverage continue to be key rating drivers. The rating is moderated by the increasing competitive pressure arising from the evolving shipping industry landscape and by high client concentration risk.

The stable outlook reflects MARC’s expectation that Westports will be able to weather the challenging shipping industry landscape while maintaining its operational and financial metrics at current levels. Downward rating pressure may occur if cash flow from operations (CFO)-to-total debt consistently falls below 0.5x. Additionally, if debt-to-operating profit before interest, tax, depreciation and amortisation were to rise above 2.5x or if any debt-funded port capacity expansion weakens its leverage position, the rating would be pressured.

Westports’ port is strategically located along the Straits of Malacca, one of the world’s busiest shipping routes; it is equipped with container terminals and wharves that cater to dry bulk, liquid bulk, break bulk, cement and roll on/roll off cargo handling. MARC notes that Westports has continued to make significant investments in recent years to upgrade its port operations with the current total container terminal handling capacity standing at 14.0 million twenty-foot equivalent units (TEUs). Its competitive position is supported by its draft limit of 17.5m and the use of the latest 52m quay cranes that can accommodate ultra large container vessels with capacities of 20,000 TEUs.

In 2H2018, Westports’ transhipment volume rebounded strongly with a 15% y-o-y growth to 6.2 million TEUs from a negative growth of 6% in 1H2018 as the impact from the changes in the shipping alliances reached its tail end. The strong growth was also supported by some front-loading shipment activities as exporters shifted products into the US ahead of the latest round of tariffs effective September 24, 2018. The higher transhipment volume coupled with healthy growth in gateway volume led to overall throughput container volume increase of 5.5% to 9.5 million TEUs (2017: 9.0 million TEUs) at end-2018.

At end-2018, excluding MFRS adjustments, overall operational revenue would have increased to RM2.0 billion (2017: RM1.7 billion) on the back of higher transhipment and gateway volume. For 2018, operating profit remained strong at RM782.3 million while its profit margin rose to 48.5% in 2018 (2017: 43.4%). Westport’s throughput volume growth continued in 1Q2019, registering q-o-q growth of 12.4%, leading to operational revenue growth of 7.8% q-o-q to RM415.2 million.

Westports’ CFO also declined to RM690.6 million at end-2018 (2017: RM1,142.0 million), in part due to an increase in receivables. Its trade receivables stood at 60 days of sales in 2018 compared to 45 days of sales in 2014. However, the risk of non-collection of trade receivables is mitigated by strength of its clients’ profiles which comprise largely reputable shipping liners.

In 2018, free cash flow (FCF) narrowed to negative RM1.9 million (2017: negative RM114.4 million), largely on the back of lower capex spending amounting to RM209.8 million (2017: RM812.0 million). Westports incurred lower capex spending following the completion of construction of CT8 and CT9 in 2017. Its FCF could weaken in the near term once Westports commences construction of new terminal facilities. Westports registered a container terminal utilisation rate of 68% in 2018. MARC expects Westports to prudently manage its dividend distribution to maintain sufficient headroom to fund its terminal expansion. In 2018, Westports up streamed dividends amounting to RM455.2 million in (2017: RM445.8 million).

Major Rating Factors

Strengths

• Strong operational and productivity performance; and
• Dominant market position with large captive hinterland.

Challenges/Risks

• Concentrated clientele base; and
• Subdued regional economic growth.