Posted Date: October 8, 2020

MARC has affirmed its rating of AA-IS on Penang Port Sdn Bhd's (PPSB) Islamic Medium-Term Notes Issuance Programme of up to RM1.0 billion with a stable outlook. PPSB operates Penang Port under a long-term concession agreement expiring on December 31, 2041.

The affirmed rating factors in our view that Penang Port would be able to weather the challenging trade environment stemming from the impact of the COVID-19 pandemic. As the key trade gateway port in northern Malaysia, Penang Port has been fairly resilient in the current environment and would benefit from any improvement in business and trade activities. PPSB has healthy cash flow generating ability and strong liquidity position to meet its operational and financial obligations. These factors notwithstanding, if PPSB's operations were affected by any deterioration in the trade environment from a surge in COVID-19 cases that could lead to second lockdown in the region, the rating/outlook would come under pressure.

During 1H2020, the port's throughput registered about 46% of 2019's full year volume despite the impact on trade after the government implemented measures in March 2020 to combat the COVID-19 pandemic. Although the restrictive measures have since been eased, the impact on trade from lower demand for goods is expected to continue in the near term. For 2020, PPSB's management is projecting a 15% y-o-y decline in throughput volume. In light of the potentially weaker performance, the company has deferred non-critical investment in IT and port equipment purchase, revising capex to RM138.0 million from a projected RM268.1 million in 2020. The deferment is expected to shore up its liquidity position.

For 2020, PPSB's pre dividend financial service cover ratio (FSCR) is projected at 2.24x against the covenanted 1.75x. Our sensitivity analysis shows that PPSB could sustain up to a 48% decline in throughput volume before it breaches the covenanted 1.75x FSCR threshold. Its ability to withstand a steep decline in overall throughput volume is due to its staggered debt repayment structure with the first repayment amounting to RM200.0 million scheduled in December 2026. The six-year period towards the earliest sukuk maturity provides ample headroom for cash build-up. Its healthy cash balance of RM204.9 million offers strong mitigation against expectations of weaker operating cash flow. We also expect the company to adhere to a stringent dividend policy in the current environment.

Raj Shankar, +603-2717 2956/ rajshankar@marc.com.my;
Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my

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