MARC Ratings has affirmed its rating on Penang Port Sdn Bhd’s (PPSB) Islamic Medium-Term Notes Issuance Programme of up to RM1.0 billion at AA-_IS with a stable outlook.

The rating affirmation is driven by the strong operational track record and healthy cash flow generation of PPSB, the operator of Penang Port, a key trade gateway port in northern Peninsular Malaysia that handles container and conventional cargo. The rating also factors in PPSB’s long-term concession agreement expiring in March 2055, and the expertise within its parent group, MMC Port Holdings Sdn Bhd, an investment holding company of several key domestic port operators. These factors are counterbalanced by its moderate equity base and the impact on its throughput volume from potential global economic slowdown and geopolitical events.

PPSB has continued to record steady financial performance. For 1Q2023, revenue rose 8.3% y-o-y to RM120.2 million, driven by higher throughput volume as well as the turnaround of its cruise terminal operations. Throughput volume for container and conventional cargo increased y-o-y by 3.5% and 9.1% to 331,816 twenty-foot equivalent units (TEU) and 1.3 million metric tonnes (MT). Its cruise segment turned around to an operating profit of RM3.4 million from a loss of RM0.3 million in the previous corresponding period, benefitting from the return of international cruise ships to the terminal since early July 2022.

The port operator’s performance follows the increased availability of empty containers to serve hinterland exports, and lower service cancellations by container operators as ports in China recommence operations. Going forward, operating loss for the ferry operations is expected to be halved to around RM8 million per annum (p.a.) with the commissioning of four new vessels.

Pre-tax profit improved by 44.0% y-o-y to RM15.5 million for 1Q2023. Operating profit before interest, tax, depreciation and amortisation (OPBITDA) interest coverage remained healthy at 3x. Borrowings stood at RM1.0 billion, comprising entirely the outstanding amount under the rated sukuk. The sukuk will begin to amortise from December 2026 onwards when the first RM200 million is due. MARC Ratings does not envisage a sharp increase in borrowings, given that PPSB’s capex programme, mainly for infrastructure and equipment, is expected to be funded internally. The port operator also has leeway to defer some of its capex spending according to capacity requirements.

The stable outlook incorporates our view that PPSB would broadly maintain its performance and credit metrics, driven by recovery in the port’s handling volumes following the easing of supply chain disruptions including improvement in the container shortage situation.

No upgrade is envisaged over the next 12 months. Over the longer term, any upgrade would consider sustained improvement in cash flow and debt metrics. 

The rating and/or outlook could come under pressure if PPSB’s performance were to deteriorate from expectations and/or if leverage were to increase on higher borrowings to fund activities that may not be earnings accretive in the near term.