MARC has affirmed its ratings of MARC-1_IS and AA-_IS on concessionaire Northport (Malaysia) Bhd’s (NMB) Islamic Commercial Papers (ICP) Programme and Islamic Medium-Term Notes (IMTN) Programme respectively (collectively known as Sukuk Musharakah Programmes). The outlook on the ratings is stable.

The affirmed ratings incorporate NMB’s operating track record stemming from its location on a key shipping route along the Straits of Malacca, its adequate cash flow generation on the back of container handling services and healthy liquidity position. These strengths, however, are moderated by NMB’s exposure to cyclical trade and economic trends and its weaker competitive position arising from port infrastructure limitations. In addition, MARC remains concerned over the potential weakening of NMB’s financial metrics should the group undertake an intensive capital expenditure (capex) programme and/or embark on an aggressive dividend policy.

NMB operates two ports in Port Klang, namely North Port and South Port; the former provides mainly container handling services with a capacity of 5.6 million twenty-foot equivalent units (TEUs) while the latter offers conventional cargo handling services with a capacity of 4.1 million freight weight tonnes. NMB’s parent company NCB Holdings Berhad (NCB) is in the process of being fully acquired by MMC Corporation Berhad (MMC) which plans to delist NCB from Bursa Malaysia upon completion of the acquisition. MARC views the privatisation of NCB would have no rating impact on the rated programmes. The rating agency believes that MMC will streamline NMB’s current business processes to strengthen the port’s operational efficiencies by leveraging on MMC’s experience in managing Johor Port and Port of Tanjung Pelepas.

NMB’s container handling business remains the primary driver of its financial performance, accounting for about 66.5% of group revenue in 2014. For 7M2015, NMB recorded 8.5% year-on-year (y-o-y) growth in its container throughput volume to 1.6 million TEUs, reversing a decline in container throughput handled in 2014, which fell 10.6% to 2.6 million TEUs following a sharp decrease in throughput contribution and port calls from a major client, A.P. Moller-Maersk Group. The improvement in the current year has been supported by fairly strong transhipment growth. Notwithstanding this, the downside risk to NMB’s container throughput volume remains, in view of the softening growth in major economies, particularly within the intra-Asia region which forms more than 70% of NMB’s client mix.

MARC does not expect any impact on NMB’s earnings over the near term following the government’s approval to allow port tariff hikes effective November 1, 2015. This is because NMB’s port charges to its major clients have been fixed under service contracts of one to three years. In addition, NMB could face challenges to impose higher port tariffs given the bargaining power of major customers; its largest and top ten clients accounted for 29.7% and 77.3% of the total container throughput in 7M2015 respectively. In respect of client concentration risk, MARC regards the longstanding relationship with major customers and the port’s operating track record as mitigating factors.

For 7M2015, NMB registered a 5.5% y-o-y increase in revenue to RM339.1 million. While NMB’s operating profit before interest, tax, depreciation and amortisation (OPBITDA) margin of 30.7% in 7M2015 was lower than its peers, its improving competitive position with the upgrading of wharf 8 as well as potential synergistic benefits from being part of MMC could strengthen NMB’s profitability going forward. The company’s cash flow from operations declined to RM43.7 million (7M2014: RM78.0 million) due to the upgrade of its sale collections and invoicing system which led to a significant increase in trade receivables. Notwithstanding this, the sukuk drawdown of RM350 million and lower-than-budgeted capital spending of RM11.0 million have allowed NMB to maintain an ample cash position of RM340.6 million as at July 31, 2015.

NMB used part of the aforementioned sukuk proceeds to fully repay its RM105 million bridging financing facility. As at July 31, 2015, the company had an outstanding debt of RM350 million translating to a finance-to-equity ratio (FER) of 0.31 times, well below the covenanted requirement of 1.75 times. Assuming NMB will proceed with the current planned capex with a projected debt level of RM700 million, NMB’s pro forma FER and debt-to-OPBITDA are expected to increase to 0.62 times and 4.00 times respectively. NMB would need to employ a more prudent shareholders’ distribution during the period of high capital commitments and weak throughput performance. Any risk of excessive cash flow leakages is mitigated by the requirement to maintain a post-distribution finance service cover ratio of 1.50 times.

The stable outlook underpins MARC’s expectations that NMB’s credit metrics will remain commensurate with the current rating band, supported by satisfactory port performance and a smooth transition to the new shareholding structure for the port operator. Downward pressure on the ratings could emerge if NMB’s gearing level and capital structure deteriorate beyond the rating agency’s expectations and/or the company’s liquidity position weakens significantly due to large dividend payouts.

Contacts:
Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.