Posted Date: May 12, 2020
MARC has assigned a preliminary rating of AA-IS to port operator Pelabuhan Tanjung Pelepas Sdn Bhd’s (PTP) proposed RM1.9 billion Islamic Medium Term Notes (Sukuk Murabahah Programme). The rating outlook is stable.
The rating reflects PTP’s strong market position as a key transhipment port in the region, its ability to generate strong cashflow and maintain healthy port performance that has continued to benefit from the expertise of its key shareholders in port operations. These factors provide a buffer against the expected sharp slowdown in global trade volumes arising from the COVID-19 pandemic, which remains a key rating concern. The stable rating outlook is premised on MARC’s expectations that PTP would be able to recover from the sudden disruption in traffic volumes and broadly maintain its cash flow metrics over the next 12-18 months.
PTP operates Pelabuhan Tanjung Pelepas port under a long-term concession expiring in 2055 and benefits from the port’s strategic location at the southern tip of the Straits of Malacca, along the Europe-Asia trading route. Both of its shareholders, MMC Corporation Berhad (MMC) (70%) and Netherland-based APM Terminals B.V. (30%), are major port operators. MMC Group owns and operates several key domestic ports, of which PTP is the largest; APM Terminals is owned by one of the world’s largest container liners by fleet size, A.P. Moller-Mærsk S/A (Mærsk). The shareholders’ expertise in port operations and their ongoing support have been the basis for the substantial growth of PTP, with its container handling capacity growing from 2.0 million twenty-foot equivalent unit (TEU)s at end-2000 to 12.5 million TEUs at end-2019.
PTP handled 9.1 million TEUs in 2019, with a utilisation rate of 73%. Total volume handled grew at a CAGR of 4.2% over the last 10 years. Any decline in container handling volume from the expected slowdown in world merchandise trade would be partly offset by the increase in demand for storage facility which will benefit PTP given its substantial storage facility. PTP will invest in its port operations to remain competitive, earmarking RM1.7 billion over the next five years, mainly for port equipment and infrastructure. The planned capex is expected to be funded internally. Proceeds from the proposed sukuk issuance will be used to refinance its existing government guaranteed RM1.5 billion IMTNs maturing in September 2020 and other existing loans.
MARC notes that Mærsk and its partner Mediterranean Shipping Company (MSC) in the 2M Alliance are also PTP’s major customers, accounting for about 84% of its container volumes. For Mærsk, PTP is its main transhipment hub, providing the port with an assurance of transhipment volumes. Nonetheless, client concentration is very high. This is substantially mitigated by the fact that Mærsk is a shareholder in PTP while the port’s comprehensive facilities and operating efficiency alleviate concerns on Mærsk shifting its operations.
PTP’s revenue grew 2.0% y-o-y to RM1.32 billion and pre-tax profit by 7.9% y-o-y to RM211.4 million in 2019, attributable to well-contained operating costs. With working capital well managed (cash conversion cycle of below two months), PTP registered positive cash flow over the past five years; cash flow from operations (CFO) was healthy at RM659.6 million in 2019, translating to a strong CFO-interest coverage of 5.08x (2018: 4.0x). Total borrowings stood at RM2.64 billion at end-2019 while its gross debt to equity (DE) ratio excluding finance lease stood at 1.09x as at end-2019; however, this is forecast to decline to 0.75x over the next two to three years. MARC expects PTP to manage capital spending and employ a prudent dividend distribution policy, particularly in light of the challenging conditions for global trade volume growth.