MARC has affirmed the AAAID(s) rating on Kuching Port Authority’s (KPA) RM180.0 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS). The rating is aligned to MARC’s recently affirmed AAA public information rating on the state of Sarawak on the basis of KPA’s status as a state-run port and a letter from the Sarawak State Government (SSG) which expresses its intent to support the BaIDS in a timely manner in addition to the payment mechanism for servicing the BaIDS provider under the issue structure. In the event of any shortfall in the debt service account (DSA), which holds the requisite funds to meet the BaIDS obligations, KPA is required to initiate a drawdown of funds under a committed RM27 million credit facility and/or issue notice to the State Financial Secretary to enable the state government to transfer funds to the DSA prior to the BaIDS service due date. The RM27 million credit facility is provided by CIMB Bank Berhad and MIDF Amanah Investment Bank Berhad. The outlook for the rating is stable.

The rating on the state of Sarawak reflects its strong financial position as a result of its abundant natural resources and strong commitment to fiscal prudence, diversified economic structure and stable political environment. The state’s real GDP growth averaged 5.3% for the period from 2000 to 2008 based on 2000 constant prices. The state’s track record of consecutive fiscal surpluses was maintained with a surplus of RM807.2 million, or 19.9% of its total revenue, in 2007. Sarawak’s public debt has remained at a manageable level of 35.1% of the total revenue in 2007. The state’s relatively high contingent liabilities of approximately RM6.6 billion as at end- 2007 continues to be a rating concern, although this is mitigated by  the state’s significant holdings of cash and cash equivalents which stood at RM8.7 billion as at December 31, 2007.

KPA, as the authority and operator of Kuching Port, is the first organised port in Sarawak to handle import and export activities of the state. As Kuching Port serves as the state’s port, its operations are highly susceptible to the state’s economic growth which has been affected by the current global slowdown.

For the financial year ended December 31, 2008 (FY2008), revenue was down marginally at RM54.8 million from RM54.9 million a year ago, as a result of the slight dip in overall cargo volume (7.55 million tonnes in FY2008 compared to 7.62 million tonnes in FY2007) and, to an extent, the continued preference for container cargo which command relatively lower revenue per tonne. Container volume increased by 3.5% at the expense of the break bulk and dry bulk segments, which declined by 2.3% and 2.8% respectively. Container cargo recorded a lower revenue per tonne of RM7.30/tonne on average as compared to RM12.35/tonne for break bulk and RM7.78/tonne for dry bulk.

KPA’s profitability declined in FY2008 due to increasing costs of fuel, oil and lubricants as well as staff salaries and allowances. The profitability would have declined further if not for an increase in other operating income. This was mainly derived from the rental payment of liquid bulk terminal totaling RM5 million (FY2007: RM3.75 million) and an increase of storage fees of RM1,956,665 in FY2008 (FY2007: RM1,032,085). Going forward, MARC expects profitability to remain under pressure in view of the lingering effects of the economic downturn affecting its revenue for most part of 2009.

Net cash generated from operating activities improved in FY2008 to RM13.4 million from RM12.5 million in FY2007 due to lower finance charges. MARC observes that net cash flow from operations is insufficient to cover the debt repayment and capital expenditure. This shortfall has been covered by a state grant and its cash reserves. The current annual BaIDS redemption of RM5.0 million will increase to RM15 million in 2010. While MARC opines that that KPA will still be able to meet its payment obligations in 2010 by drawing on the RM27 million credit facility, MARC anticipates that KPA will likely rely on the financial support of the SSG beyond 2010 to meet its increasingly heavy debt maturities.

The rating on the BaIDs would be affected by a change in the credit quality of the state of Sarawak, non-compliance with the payment mechanism for servicing the BaIDs and/or a weakening of SSG’s support.

Contacts:
Khairul Emran Mahmud 03-2090 2278/ emran@marc.com.my ;
Sandeep Bhattacharya 03-2090 2247/ sandeep@marc.com.my