MARC has affirmed its MARC-1_IS and AA-_IS ratings on Northport (Malaysia) Bhd’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-December 2019. 

The ratings primarily reflect Northport’s strength as an established domestic port operator providing container and conventional cargo handling services, its improving margins through cost synergies as a member of the MMC Group and its satisfactory credit metrics. These factors are offset by the continued decline in container throughput volume and high client concentration risk. 

Northport operates North Port (main port) and Southpoint (focuses on short-sea trades) in Port Klang under long-term concessions expiring in November 2043. During 1H2019, Northport’s container handling volume remained pressured, declining by 2.6% y-o-y to 1.3 million twenty-foot equivalent units (TEUs). The continued decline has largely been due to residual impact from the recent restructuring of the world’s major shipping alliances that led to a diversion of throughput to surrounding ports. The upward tariff revision of about 13% which came into effect in March 2019 had limited impact on revenue growth in the container handling services segment. In addition, while the conventional throughput volume grew by 10.2% y-o-y to 4.5 million freight weight tonnes (FWT) (1H2018: 4.1 million FWT), this has not translated to revenue growth. 

Higher rental income from warehouses in line with more transloading of conventional cargo largely accounted for the total revenue growth of 3.6% y-o-y to RM323.3 million in 1H2019. Cost synergies within the MMC Group led to a sharp reduction in staff cost and other expenses. This led to higher operating profit of RM96.9 million (1H2018: RM35.7 million), translating into an operating profit margin of 30.0% (1H2018: 11.4%). 

Cash flow from operations (CFO) improved sharply to RM81.3 million (1H2018: RM28.0 million) in line with the higher operating profit. Coupled with lower dividend paid of RM22.5 million (1H2018: RM62.5 million), free cash flow (FCF) turned positive to RM21.4 million (1H2018: negative RM67.4 million). As at end-June 2019, cash and bank balances of RM288.8 million was moderate relative to its total borrowings of RM450.0 million. Finance-to-equity ratio (FER) was higher at 0.67x (2018: 0.49x), mainly due to the adoption of the MFRS framework which resulted in a lower base of shareholders’ equity. 

Northport has earmarked around RM417.0 million for the construction of new warehouses and development of a free zone area over the next two years. Part of the capex is expected to be funded through sukuk proceeds. An additional RM200 million in planned borrowings to part fund its near-term capex would exert pressure on its leverage position. Its pro forma FER could increase to 0.96x. Without a corresponding increase in business volume following the capex investment, the overall credit metrics would weaken. Moving forward, the rating agency expects the company to prudently manage its capital spending and dividend distribution to maintain a healthy cash buffer in the event of any non-discretionary cash outlays.

The stable outlook incorporates expectations that Northport will maintain its operating performance afforded to it partly through the synergistical relationship with sister ports. The stable outlook is also supported by the upward revision of the container tariff from March 2019 that would improve its operating profit margin.