Posted Date: November 27, 2019
MARC has assigned a preliminary rating of AA-IS to port operator Penang Port Sdn (PPSB) proposed Islamic Medium-Term Notes Issuance Programme of up to RM1.0 billion. The rating carries a stable outlook. PPSB operates Penang Port under a long-term concession agreement expiring on December 31, 2041. Proceeds from the proposed issuance will be entirely used to refinance PPSB’s maturing RM1.0 billion loan, which was taken to finance the port’s capacity expansion in 2008.
The rating is driven by Penang Port’s strategic importance as the key trade gateway port in northern Malaysia and PPSB’s established track record in providing container and conventional cargo handling services, enabling the port operator to generate steady cash flow. Moderating the rating is PPSB’s high leverage position largely due to a modest growth in shareholders’ funds over the years. Additionally, the port operator could face challenges to turnaround the ferry services segment if the loss-making Penang commuter ferry services are reabsorbed into PPSB’s operations.
Penang Port’s close location to manufacturing centres in Penang and industries, particularly those involved in rubberwood production, in southern Thailand, has been a key factor for the port’s growth. PPSB has also benefited from improved operating and cost efficiencies from being part of the MMC group, a major domestic port operator. It became a wholly-owned subsidiary of the MMC Port Holdings Sdn Bhd (MMC Ports) in May 2018.
As at end-2018 the port recorded a container handling capacity of 2.1 million twenty-foot equivalent units (TEUs) and a conventional cargo handling capacity of 9.6 million freight weight tonnes (FWTs). PPSB plans to expand its handling capacity and improve productivity measures for which it has earmarked about RM674 million between 2019 and 2023. This is expected to be funded by internal cash generation. MARC views the staggered capex programme over a four-year period would not have a material impact on free cash flow generation. The expansion is expected to result in a 25% increase in container volume capacity to 2.5 million TEUs over the near term. Penang Port’s productivity measures are comparable with that of its peers. Its utilisation rate of the container terminal stood at around 71.9%. The rate is likely to be constrained going forward by the additional capacity coming onstream as well as geopolitical risks that could weigh on global trade volume. Any decline in global trade would be moderated by renewed economic activities in Penang due to the substantial increase in approved investments in the state to RM129.1 billion in 2018 (2017: RM10.0 billion).
MARC notes that there is no capital outlay for capital dredging during the sukuk tenure. PPSB plans to undertake capital dredging only in 2032 as its current channel depth of 11m is sufficient to receive mid-sized vessels and cruise liners. Post-2032, it is expected to spend up to RM200 million to deepen its north channel, funded by its shareholders under the terms of the privatisation agreement. Maintenance dredging is estimated at about RM15 million p.a., lower than the RM25 million p.a. previously, with the cost savings coming from undertaking inhouse maintenance dredging.
For 2018, the container services segment accounted for 69% of PPSB’s RM478.9 million revenue (2017: RM480 million) on the back of flat container volume handled at 1.5 million TEUs. However, combined conventional cargo grew by 4% y-o-y to 10.4 million FWTs and accounted for 14.5% of revenue. Contribution from marine services and the cruise terminal remained modest at 7.3% and 4.1%. For the latter, PPSB will expand its cruise terminal berth to 688m from 400m at a cost of RM155 million. The expansion is being undertaken on a joint-venture basis and will enable the company to handle 12,000 passengers from 8,000 currently.
In respect of ferry operations, under an arrangement with the government, PPSB is expected to reabsorb the Penang commuter ferry services, which had been excluded from the company as part of the privatisation arrangement in 2016. PPSB has submitted a proposal for a new business model to turn around the ferry operations. Assuming the ferry services would remain loss-making over the medium term, the impact on PPSB’s cash flow coverage metrics is not expected to be material in MARC’s analysis.
Cash flow from operations (CFO) has remained strong, registering RM232.3 million, translating to a healthy CFO interest coverage of 4.48x (2017: 3.16x). PPSB’s borrowings level relative to shareholders’ funds, however, remained elevated since the completion of the capacity upgrade in 2008. Total borrowings stood at RM1.0 billion with a net debt-to-equity (DE) ratio of 1.44x (2017: 1.70x). MARC expects earnings retention through disciplined dividend to improve capital structure going forward.
The stable rating outlook assumes PPSB’s cash flows will remain supportive of its financing and capex requirements and that leverage ratio will show steady improvement.
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