Stacking up MMC’s ports against Westports

This article first appeared in The Edge Malaysia Weekly, on April 24, 2017 - April 30, 2017.

Westports handles fewer TEUs per year than MMC’s port and logistics division, but its profit is higher

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EARLIER this month, when MMC Corp Bhd announced that it was buying the remaining 51% of Penang Port Sdn Bhd it does not own for RM220 million from parent Seaport Terminal (Johore) Sdn Bhd, talk of an impending initial public offering — that of MMC’s port and logistics arm — resurfaced.

It has got the investing fraternity wondering whether the IPO will take the shine off Westports Holdings Bhd, a container terminal operator with a market capitalisation of about RM14 billion.

The listing of MMC ports is likely to take place next year, the group’s managing director, Datuk Seri Che Khalib Mohamad Noh, told The Edge in an interview in February.

It is estimated that the IPO will raise as much as US$700 million, or RM3.08 billion, as reported by The Wall Street Journal, and could be among the largest in the region.

The analysts and market watchers The Edge spoke to do not seem to think the new listing will outshine Westports. And judging by the financials of Westports and MMC’s port unit, their estimates hold water.

Ports in MMC’s stable include the Port of Tanjung Pelepas Sdn Bhd (PTP) in Johor, Johor Port Bhd, Penang Port Sdn Bhd — the country’s northernmost container handling facility — and NCB Holdings Bhd, which controls Northport Bhd and Kontena Nasional Bhd.

MMC owns 70% of PTP while the remaining 30% is controlled by APM Terminals.

Westports operates a single terminal in Port Klang.

“I do not think it [MMC’s port IPO] will have much of an impact on Westports. We [the analysts’ fraternity] know PTP’s numbers and we know Westports is more efficient,” says an analyst with a bank-backed securities firm.

 

Westports has better financials

To put things in perspective, MMC’s ports collectively handled 15.6 million 20-foot equivalent units (TEUs) while Westports handled 9.95 million TEUs last year.

Nevertheless, Westports registered a net profit of RM636.98 million on revenue of RM2.03 billion for its financial year ended Dec 31, 2016 (FY2016). In contrast, MMC’s port and logistics division saw a profit before tax of RM456.7 million on revenue of RM2.73 billion for FY2016.

Thus, despite handling 64% more TEUs and having more ports, MMC’s earnings do not reflect its larger port operations.

While certain quarters say PTP, MMC’s port division’s main revenue generator, is largely a transshipment port, with 95% of its throughput being transfer cargo, it has to be noted that as much as 70% of Westports throughput comes from transshipment too.

PTP handled 8.03 million TEUs in 2016, according to the Ministry of Transport’s website. Of this almost 94%, or 7.54 million boxes, were transshipment. Northport handled around 3.26 million TEUs, Johor port 827,013 and Penang handled 1.44 million TEUs.

PTP’s transshipment rates are generally confidential. At Port Klang, Westport and Northport charge about RM160 for transshipment of a TEU and RM245 to RM260 per import or export TEU, depending on whether it is empty or a full container load, and about RM240 per transshipment of a 40-foot equivalent unit and RM360 to RM400 per import or export FEU.

In FY2015, PTP registered a net profit of RM177.4 million from RM1.2 billion in revenue from a throughput of 9.1 million TEUs. PTP’s financials for FY2016 are not available.

Westports made RM504.86 million in FY2015 from RM1.68 billion in sales on the back of 9.05 million TEUs handled.

Other ports in MMC’s stable did not fare that well either.

NCB Holdings registered a net profit of RM21.6 million from RM834.61 million in revenue, while Johor Port made a net profit of RM116.48 million from RM618.25 million in revenue. Penang Port earned a net profit of RM2.22 million on RM399.48 million in turnover.

In August last year, MMC acquired a 49% stake in Penang Port from its parent Seaport Terminal for RM200 million cash, and earlier this month announced the acquisition of the remainder 51% for RM220 million, which market watchers say is a prelude to a floatation exercise of MMC’s port unit.

On Westports much better financials, a port official explains, “It’s a question of efficiency.”

Westports’ average of 35 gross moves per hour (meaning 35 containers are taken off of a ship in an hour and placed on a waiting truck) is above the shipping industry’s average of 25.

Higher efficiency at the port translates into lower ship berthing and less waiting time.

Until 2004, PTP had a high efficiency level, recording average mainline productivity figures of 34.62 gross moves per hour, but how it is faring now is not known.

To make matters worse, there was an oil spill at PTP in September last year, which adversely impacted the port.

“We could be better than Singapore in terms of movement. The difference is they are quite consistent in delivering their results, ours can be quite typically Malaysian — maintenance issues, workers problems...,” Che Khalib had said, acknowledging that there is room for improvement in efficiency at PTP.

Nevertheless, he believes Malaysia can be more cost-effective with more infrastructure put in place, compared with Singapore and Indonesia, which are expanding their ports.

 

Lack of connectivity at PTP

PTP’s poor connectivity is well known in the industry and the problem has never really been addressed. Other than Maersk Line, which is owned by APM Terminals, PTP only has Taiwanese Evergreen Shipping Corp calling regularly.

Other vessels that call at PTP come as a result of vessel-sharing arrangements between shipping lines.

“It’s been the same two lines — Maersk and Evergreen — for so many years now. Incentives were given by the government, and there was much hope, but the numbers have been slow to gain momentum. Some of the growth in throughput has been a result of Maersk taking over other shipping lines, such as P&O Nedlloyd,” the port official highlights.

While there was talk a few years ago of closing down Johor Port’s container arm and moving it to PTP, which is located about 90km away, the idea never took off.

According to reports, the government shot down the idea of merging the two container businesses as manufacturers operating in Pasir Gudang, Tampoi and Tebrau complained of higher transport costs.

Other than the above, there are ship-to-ship operations off PTP, but whether this generates any real income for the port is not known.

Another issue is that MMC’s controlling shareholder, Tan Sri Syed Mokhtar Albukhary — who holds 51.76% equity interest in the conglomerate through Seaport Terminal and other private companies — is heavily geared.

In FY2016 ended Dec 31, MMC posted a net profit of RM549.66 million from RM4.63 billion in revenue. As at end-December last year, MMC had bank deposits and cash balances of RM1.22 billion.  However, long-term debt commitments amounted to RM7.55 billion while short-term borrowings were RM1.49 billion.

The sheer size of the group’s borrowings has raised eyebrows.

Nonetheless, Che Khalid says the bulk of the group’s debts are project-financed. “For example, at MMC level, our total debt is RM26 billion, but RM17 billion is at Malakoff and RM2.6 billion at PTP. The rest is very small. At corporate level, it is only RM3.5 billion ... We don’t have borrowings at shareholder (MMC) level. Borrowings are all at the operating companies and they can generate enough cash as they are all making profits,” he told The Edge.

Other than his flagship MMC, Syed Mokhtar also controls 55.92% of diversified DRB-Hicom Bhd through private vehicle Etika Strategi Sdn Bhd.

For its nine months ended Dec 31, 2016, DRB-Hicom suffered a net loss of RM125.95 million from RM8.58 billion in revenue. Among its assets are Proton Holdings Bhd, the ailing carmaker, which is likely to be hived off soon.

So, it would seem that much of the appeal of MMC’s port business lies in the third port in Port Klang, to be built on Carey Island.

Earlier this month, MMC Port Holdings Sdn Bhd, Sime Darby Property Bhd and Adani Ports and Special Economic Zone Ltd, signed a memorandum of understanding to study the feasibility of developing an integrated maritime city on Carey Island.

MMC Port Holdings and Adani Ports signed a separate MoU to explore the feasibility of the Carey Island Port Project as an extension of Port Klang.

Then again, this is only an MoU, and is only likely to impact MMC’s port division’s bottom line the long term.