MARC Ratings has upgraded port operator Pelabuhan Tanjung Pelepas Sdn Bhd’s (PTP) RM2.15 billion Islamic Medium-Term Notes (Sukuk Murabahah Programme) rating to AA_IS from AA-_IS. The rating outlook is stable. The outstanding under the rated programme stood at RM2.1 billion as at March 13, 2023.

The rating upgrade is premised on PTP’s strengthened credit profile, driven by higher cash flow generation from sizeable handling volume and improved margin, leading to an improvement in debt protection metrics. The port operator has also demonstrated resilience to economic downturns, including the impact from the pandemic and recent geopolitical tensions. Cash flow from operations (CFO) to debt and interest coverages of 0.3x and 9.5x in 2022 are strong and reflect PTP’s discipline in managing its borrowings and capex.

PTP’s status as a key transhipment container port in the region, supported by continued investments to improve port efficiency, underscores its strong competitive position. The combined expertise of shareholders MMC Port Holdings Sdn Bhd (MMC Port) (70%), and Netherland-based APM Terminals B.V. (30%), both of which have established track records in port development and operations, remains a rating consideration. MMC Port owns several key port operators in Malaysia; APM Terminals is owned by A.P. Moller-Maersk A/S (Maersk), one of the world’s largest container liners and has interests in more than 70 port facilities globally. 

PTP’s container throughput volume of 10.5 million twenty-foot equivalent units (TEU) in 2022 was strong; although declining from 11.2 million TEUs in 2021 — partly due to easing of supply-chain disruptions — it remained higher than around 8-9 million TEUs recorded in 2017-2019, prior to the pandemic. PTP’s handling volume would remain supportive by Maersk for which it is a key transhipment hub; Maersk has consistently contributed to about 70% of the port’s throughput volume.

Going forward, the dissolution of the 2M alliance between Maersk and the Mediterranean Shipping Company (MSC) by 2025 could result in some decline in TEU volume contribution from MSC. However, this is expected to be offset by an increase in volume from Maersk. Nonetheless, assuming no revenue contribution from MSC (from the current 23%), we project CFO interest coverage of about 7x.

For 2022, PTP recorded revenue of RM1.7 billion. Operating profit margin rose to 37.1% from 24.3% in 2017, mainly driven by steadily improving port efficiency and cost-saving initiatives. CFO generation was healthy at RM834.9 million, fully funding capex of around RM400 million in 2022. Borrowings remain stable at RM2.3 billion with no notes maturing in 2023-2024. PTP has a planned capex of around RM1.6 billion over 2023-2024, mainly to complete the development of a new berth and for investment in key port infrastructure replacements. As this is expected to be funded by internally generated cash, we do not expect a rise in borrowings. As around 40% of the capex plan for 2023-2024 is committed, PTP has flexibility to defer non-essential and expansionary capex according to prevailing container volume handling requirements. Its liquidity position remains strong with cash balances of RM840.0 million as at end-2022. 

The stable outlook reflects our expectation that PTP’s credit metrics would be in line with the rating band.

We do not envisage any upside to the rating and/or outlook over the next 12 months.

The rating and/or outlook could come under pressure if PTP’s financial performance declines substantially from expectation as a result of negative shifts in the prospects of the shipping industry and/or if cash flow metrics were to decline sharply.