MARC has affirmed its AA+IS rating of port operator Westports Malaysia Sdn Bhd’s (Westports) RM800.0 million Sukuk Musyarakah Medium-Term Notes (Sukuk Musyarakah MTN). The rating outlook is stable. The affirmed rating considers Westports’ competitive position, operational track record, continued robust cash flows from operations and financial flexibility. Since MARC’s last rating action in January 2010, Westports has exhibited an improvement in its operating performance boosted by double digit growth in container throughput volume. The rating also incorporates the competitive and cyclical nature of port operations, and Westports’ somewhat concentrated customer base. The stable rating outlook reflects expectations that a sustained rebound in international trade flows will drive growth in port’s throughput and support credit metrics consistent with the affirmed rating in the near-to-medium-term.

Westports is one of two main private port operators in Port Klang, the main gateway for the industrialised hub of Klang Valley. Since 2007, Westports has held more than 60% of the market share of container throughput in Port Klang. The Malaysian federal government holds one special share in Westports via the Minister of Finance Incorporated and an indirect 8.55% stake through Khanazah Nasional Berhad, which implies the economic importance of Westports’ infrastructure and operations. Substantial shareholders in Westports Holdings Sdn Bhd are private infrastructure operator, Pembinaan Redzai Sdn Bhd (42.90%) and world’s largest container terminal operator, Hutchison Port Holdings Ltd.

Westports’ operations continue to maintain a low risk profile in MARC’s view, as reflected in its “Fastport” productivity standards of an average 35 moves per-hour-per-crane-per-ship, and placing it among the top five productive ports in the world. Westports’ container handling capacity stands at 7.0 million twenty-foot equivalent units (TEU) following the completion of container terminal CT5 in August 2008. Westports is in the midst of a capacity expansion programme to increase the port’s capacity by constructing a new container terminal, CT6. While Westports’ expansion plan entails financial and execution risks, MARC takes comfort from the port operator’s flexibility to defer certain investments should there be a reversal in demand trends as well as its record of successfully implemented expansion programmes.

Following a challenging 2009, container cargo at Malaysian ports have showed a meaningful rebound, reflecting recovery in both domestic and transhipment cargo. Port Klang’s container throughput rose 24.8% in the first 10 months of 2010 compared to a year-ago, of which 61.7% or 4.58 million TEU was generated by Westports. Westports met its full year projected throughput of 5.55 million TEU in 2010, a 24.7% increase from the previous year. The port operator expects to handle 6.0 million TEU in 2011. Westports’ throughput volume growth was partially attributed to new clients of main line operators United Arab Shipping Agency (UASC) and Mitsui OSK Line (MOL). UASC became Westports’ fifth largest customer, contributing 5.1% of its TEU volume for the first nine months of the year. Westports’ concentration of key clients, common in most ports, has resulted in higher exposure to the clients’ credit risk. Currently, Westports has a client base of more than 20 regular customers, of which its largest customer contributes 42% of total throughput and 25% of revenue. Deterioration in the financial health of its key customers could foreseeably affect Westports’ credit profile given somewhat concentrated customer base. MARC believes this risk has lessened with the improving shipping industry fundamentals.

Compared to the corresponding period last year, Westports’ revenues and pre-tax profit for the first nine months of the year (9M2010) were up by 16.2% and 46.7% respectively, driven by a recovery in throughput volumes and improvement in gross margins to 58% from 53%. During the period under review, the container segment contributed 81% to total revenue while conventional cargo, marine activities and rental of facilities contributed the remainder. In line with Westports’ improved profitability, operating profit before interest, tax, depreciation and amortisation (OPBITDA) interest coverage improved to 16.8 times (x) (9M2009: 11.4x). Westports’ debt-to-equity ratio which has remained below 1.0x since FY2006, improved to 0.33x in 9M2010 through earnings retention during the period. Westports’ shareholders’ funds improved to RM1.21 billion in 9M2010 (FY2009: RM1.13 billion), despite fairly high dividend payout of RM132.51 million or 50% of FY2009 net income. In FY2009, Westports maintained favourable covenant headroom, as evidenced by its facility-to-equity ratio (FER) and finance service coverage ratio (FSCR) of 0.37x and 5.38x respectively, against covenant levels of 2.0x and 1.25x respectively.

Westports’ strong cash generation should enable it to fund its routine capital expenditure plans and its upcoming RM100 million principal redemption and profit payment under the rated Sukuk, together with its RM323.5 million cash and fixed deposits holdings as at September 30, 2010. MARC views Westports’ financial flexibility to be high with committed undrawn facilities of RM355 million as at September 30, 2010. The available facilities could be channelled towards its capacity expansion funding requirements in the next two years. Additionally, its dividend payout may be scaled back to conserve funds for its capex requirements.

The rating could come under pressure if Westports’ cash flow strength is impacted by a deterioration in business conditions and/or planned capacity expansions fail to generate satisfactory returns.

Contacts:
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my;
Khairul Emran Mahmud, +603-2082 2278/ emran@marc.com.my;
Ezien Hoo, +603-2082 2267/ ezien@marc.com.my.