MARC Ratings has upgraded Northport (Malaysia) Bhd’s RM1.5 billion Sukuk Musharakah programme rating to AA_IS from AA-IS. Concurrently, the rating agency has revised the rating outlook to stable from positive.

The rating upgrade is premised on Northport’s sustained strong profitability metrics, resulting in strong cash flow from operations (CFO) interest and debt coverage ratios. The rating action also considered its maintenance of a healthy liquidity position. Operating profit before interest, tax, depreciation and amortisation margins have stood well above 50% over the last four years. CFO interest and debt coverages stood at 15.6x and 0.9x; with a cash balance of RM537 million and borrowings at RM450 million, the group is in a net cash position as at end-June 2022.

Northport handles container services and conventional cargo services through its two main terminals, North Port and Southpoint. The group has also established an automotive terminal and biomass hub. For 1H2022, container handling volume declined by 5.7% y-o-y to 1.6 million twenty-foot equivalent units (TEUs) mainly due to the impact of the high freight rate environment that led to liners temporarily prioritising long-haul routes. The decline was offset by the strong increase of 11.5% y-o-y to 5.5 million freight weight tonnes (FWT) in conventional cargo services, which include chemical, petroleum, iron, and biomass products. 

Revenue rose marginally by 2% y-o-y to RM428.5 million; however, operating profit decreased by 4.9% y-o-y to RM158.0 million, mainly due to an increase in energy costs. Operating profit margin of above 30% was supported by cost-rationalisation initiatives. The group has a planned capex of about RM900 million by end-2023 that would be funded through a mixture of internal cash and borrowings for its expansion plans. Given its sustained operating performance, its internal cash generation would remain supportive of its funding requirement. At the same time, Northport has sufficient headroom under its rated programme for funding, if needed.

Total notes outstanding is RM450 million under the Sukuk Musharakah programme with RM100 million maturing on December 2, 2022, which will be redeemed via internal funds. Following the expiry of the RM500 million Islamic Commercial Papers programme, the rating coverage is limited to the IMTN programme.

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

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

The rating and/or outlook could come under pressure if Northport’s financial performance deteriorates sharply and/or if borrowings substantially increase, leading to a weakening balance sheet, in particular if gross leverage weakens to above 0.8x without definitive plans to improve its leverage position.