MARC has affirmed its AA+IS rating on Westports Malaysia Sdn Bhd's (Westports) RM2.0 billion Sukuk Musyarakah Programme with a stable outlook. The affirmed rating reflects Westports' strong market position as a transhipment hub in the region through its operations of five conventional terminals and seven container terminals that have a total handling capacity of 11 million twenty-foot equivalent units (TEU) per annum. Westport remains the dominant port in Port Klang which ranks as the 12th busiest container port globally. Operating under a long-term concession expiring on August 31, 2054, Westport's continued investments to upgrade its port operations have been key in generating throughput growth and maintaining high operational efficiency. The rating is also supported by Westports' solid financial metrics which are characterised by stable operating margins, strong finance service coverage and moderate leverage. These positive factors, however, are moderated by Westports' high client concentration risk and aggressive dividend policy that has contributed to a negative free cash flow (FCF) position. In addition, port operations remain susceptible to global economic growth.
Container throughput remains the key driver of Westports' financial performance, accounting for 83.3% of operational revenue of RM1.5 billion in 2014 (2013: 81.9%; RM1.3 billion). In 2014, TEU handled grew 12.1% year-on-year to 8.4 million, boosted by the commencement of full operations of Container Terminal 7 (CT7), which added a handling capacity of 1.5 million TEU. The rapid growth of intra-Asia trade flows and the fairly strong domestic economy growth of 6.0% in 2014 supported throughput growth. Over the intermediate term, the improving economic outlook in Asia and Europe is expected to sustain Westports' growth, although downside risks to global economic growth could emerge given the headwinds in some major economies and the modest near-term forecast for world trade growth of 3.3% in 2015.
MARC notes that Westports' client concentration risk remains high; its largest customer CMA CGM Group and top 10 customers accounted for about 19% and 60% of total revenue respectively in 2014. However, MARC regards the risk to be manageable and characteristic for ports of similar scale given that a few players dominate the shipping industry. Westports' operational efficiencies are reflected in its solid and stable operating profit margin, averaging 40.5% over the past five years (2014: 42.9%). Pressure on the margin could emerge from the stronger bargaining power of the recently formed Ocean Three (O3) alliance comprising CMA CGM, China Shipping Container Lines and United Arab Shipping Company, all of which are its existing major customers.
MARC views the container tariff hike that is currently pending government's decision would alleviate any cost pressures. While the timing remains uncertain, given that the last revision was in 2003, the likelihood of a tariff hike being granted in the near term has increased. MARC does not foresee any material negative impact on Westports' competitive position after the tariff hike given the port operator's longstanding relationship with major customers and the higher congestion levels at competing ports.
For 2014, Westports generated slightly lower operating cash flows (CFO) of RM614.6 million (2013: RM685.6 million) after settling the remaining amounts for the development and construction of CT7. While Westports' CFO was sufficient to cover its capital expenditure for the year, FCF was negative RM58.5 million (2013: negative RM1.0 billion) due to high dividend payouts. MARC opines that over the medium term, FCF will remain pressured given the capital expenditure requirement for the development and construction of CT8 and the requirement to channel sizeable dividends to parent Westports Holdings Berhad in line with the parent's 75% dividend payout policy. CT8 will be developed in two phases at a cost of RM1.0 billion. The rating agency considers Westports' plan to proceed with the CT8 as reasonable, considering that its 2014 throughput volume accounted for a substantial 76.1% of current handling capacity. CT8 is expected to provide an additional 2.5 million TEU of container handling capacity when completed in mid-2017.
Westports retains good financial flexibility to address FCF deficits, stemming from the absence of debt maturities until 2021 and strong liquidity position with a cash balance of RM444.5 million as at end-2014 (2013: RM341.6 million). In addition, the port operator has unutilised credit under the Sukuk Musyarakah Programme of RM850 million. The anticipated increase in borrowings for CT8 would expand Westports' debt-to-equity ratio to between 0.75 times (x) and 0.85x from 0.66x as at end-2014 (2013: 0.57x).
The stable outlook is based on MARC's expectations that Westports' throughput and revenue growth will remain steady over the next 12 to 18 months. A higher-than-expected increase in financial leverage without any commensurate growth in earnings and CFO will exert pressure on the rating.
Contacts: Koh Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my.
© Press Release 2015
