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 has been revised to positive. 

The outlook revision incorporates the continued improvement in Northport’s credit metrics on the back of substantial growth in its throughput volume. Its stable group borrowing levels and strong liquidity position have also translated to a stronger credit profile. The rating would be upgraded over the next 12-18 months if Northport sustains its earnings growth while maintaining a debt-to-equity ratio of about 0.5x and cash flow from operations debt coverage of more than 0.5x. 

The ratings affirmation is driven by Northport’s established position in providing container and conventional cargo handling services through its two main terminals North Port and Southpoint in Port Klang and its healthy cash flow generation, underpinned by an accommodative tariff structure under long-term concessions expiring in November 2043.

Despite the ongoing challenging trade environment and global supply chain disruptions amid the COVID-19 pandemic, Northport’s revenue grew 40.4% y-o-y to RM420.0 million in 1H2021, in line with higher throughput volume. Both container and conventional cargo volumes rose by 43.1% y-o-y to 1.7 million twenty-foot equivalent units (TEUs) and 29.8% y-o-y to 5.0 million freight weight tonnes (FWT). Its container handling volume growth was mainly driven by commencement of new intra-Asia services. The port’s steady earnings in 2020 reflects its defensible market position as a major hub for the intra-Asia trade route.

Conventional cargo operations have benefited from higher handling volume for palm oil, grain, iron and steel products, as well as higher roll-on/roll-off (ro-ro) shipments during this period. Overall operating profit margin stood stronger at 39.6% (1H2020: 23.7%) in line with the higher throughput volume, supported by improved pricing structure and operational efficiency. Moving ahead, Northport is expected to maintain its operating performance as demonstrated by stability of its income that notably benefits from the reopening of economies.

Finance-to-equity ratio (FER) improved to 0.53x (1H2020: 0.60x), supported by better earnings. Outstanding under the rated programmes remained at RM450 million as at end-October 2021. Northport’s moderate capex plan totalling RM46.0 million and RM330.7 million in 2H2021 and 2022 that is expected to be funded internally and should enable the port to maintain its borrowings level.

The positive outlook considers substantial improvement in Northport’s earnings which supports strong cash flow generation and leverage position.

The ratings would be upgraded if Northport sustains its earnings trajectory and maintains its leverage position over the next 12-18 months while maintaining a healthy liquidity position.

The outlook could revert to stable if the company faces volatile earnings from the dynamics of the shipping industry and/or if borrowings were to substantially increase without the corresponding earnings accretion or if cash position weakens due to sizeable dividend upstream.