WHEN Malaysia Mining Corp Bhd (MMC) paid a whopping RM1.6 billion for a 50.1 per cent stake in Port of Tanjung Pelepas (PTP), many were sceptical, suggesting that the conglomerate's acquisition was questionable given the long gestation period of a port operator and its hefty capital expenditure.
They were concerned that MMC could be over reaching itself.
Many observers were wondering when the port, whose mainstay is transhipment cargo (the yields among transhipment cargo ports are generally lower than that of import and export containers), would break even.
Up to 95 per cent of PTP's container throughput is transhipment in nature, with only the remaining five per cent involving import and export cargo. PTP's transhipment rateis unofficially RM200 per 20-foot container, while that of import and export cargo is at RM235 for a similar sized box.
Still, the acquisition of PTP was deemed a major transformation for the MMC group, which used to be a traditional mining, utilities and engineering entity.
Today, however, the tide has changed. After handling 2.66 million containers last year, and dethroning Northport as the busiest port in the country, PTP officials are confident of signing on more shipping lines, increasing throughput and as a result, its earnings.
An analyst from GK Goh expects PTP to break even in FY03. He expects the port to handle around 3.8 million container boxes.
“The break even point is generally three to four years after initiating operations. In PTP's case it is relatively fast, considering the huge expenditure involved. “After initiating operations in 2000, the port has progressed really fast to handle more than 2.66 million containers last year,” he says.
For the first phase of development, six berths and 24 quay cranes, cost in the region of RM3 billion, while the second phase which involves another eight berths and possibly more than 30 cranes will cost some RM3.6 billion.
The market is at the end of the day the clearest indication of how favourable PTP is for MMC. MMC’s share price hit a five-year high in April last year peaking at around RM3.50 when the port it had yet to complete acquiring, signed a major agreement with Taiwanese giant liner Evergreen Marine Corp for six years. In a span of two weeks, MMC's share price went up by 67 sen to a high of RM3.50.
There are, however, concerns on MMC’s gearing level, which post-PTP acquisition, had increased to 0.7 times. Generally, while analysts believe that the PTP acquisition should add value to MMC in the longer term, they are concerned about the immediate impact on MMC’s finances.
As for the port, with heavy expansion plans in the pipeline and the second phase alone costing some RM3.6 billion, observers had earlier expected the port to face an uphill task breaking even.
The cost of five quay cranes alone, from a tie-up between MMC Engineering and Zhenhua Port Manufacturing Company, set PTP back by some RM97.1 million. The cost does not include land reclamation and dredging works.
GK Goh Research House states that based on PTP's cashflow projections, the internal rate of return for MMC will be improved to 13 per cent from the current return on equity amounting to six per cent. The research house goes one step further stating that MMC's 13 per cent return from the port is higher than the conglomerate's 9.7 per cent cost of capital.
An analyst from the research house adds that PTP 's profitability will be centred around Evergreen Marine's full shift to the relatively new port, and more interestingly after Johor Port's 600,000 odd containers are shifted from Pasir Gudang to PTP. As one high-ranking port official says, “It does not make sense to have two ports within a mere 70 kilometres of each other.”
While GK Goh Research predicts a 3.8 million TEUs (20-foot equivalent units) handling for PTP by this year end, PTP officials have been more conservative with a 3.5 million target.
The research house also forecasts PTP turning to the black due to the completion of debt refinancing, saving about RM80 million per annum.
Internally, the management of PTP is positive that the port can achieve profitability as early as 2003. This is predicated on the port handling at least 3.5 million TEUs, up from the 2.5 million -2.7 million TEUs that it was likely to handle in 2002. This increased volume is based on the projected throughput coming from Evergreen’s transfer of its trans-shipment activities to PTP, which began in August 2002.
An analyst points out that this projection on profitability by PTP’s management is in contrast to the more conservative projections used in preparing the circular to MMC shareholders in relation to the PTP acquisition where PTP is only “expected to contribute positively to future earnings of the MMC group by the financial year 2006”.
PTP's selling point includes its high productivity levels, 31 moves per crane hour, and a huge land bank available. The port currently occupies almost 2,000 acres of land and has ample room for expansion.
In fact, there is much interest in the port's high performance, productivity and efficiency levels. It is believed that some shipping lines calling at other terminals in the country have expressed interest to call at PTP, even with PTP's pricing being higher than Port Klang's RM140 per transhipment container by some 30 per cent.
With only a quarter of Evergreen's container throughput accounted for last year, as the Taiwanese giant liner only started calling at the port in the fourth quarter, PTP should add on another 800,000 container boxes at least.
In fact sources close to the company say the port officials have been aggressively marketing their facilities and are on the look out for medium-sized liners to fill up the port's capacity of 4.5 million TEUs.
The port has excess capacity of about one million containers, after deducting 30 per cent owner Maersk Sealand's two million boxes, Evergreen's one million boxes this year and another 500,000 from several other smaller feeder lines.
Even more interesting is the prospect of PTP increasing the number of main line operators. Once the two additional berths, which are part of the second phase of expansion, are completed at the end this year, PTP will be scouting for yet another main line operator to fill in the vacant berths, sources within the industry say.
Despite PSA tying up long-term terminal service agreements with 50 per cent of its clients, seen as a move to stem the migration of shipping lines to PTP, and offering year long discounts of up to 50 per cent, the PTP officials are confident of pulling off more coups.
“The long-term contracts (signed) mean nothing. It is the same as when Mearsk (Sealand) and Evergreen (Marine Corp) wanted to shift their hub. They (the two shipping lines) had contracts as well. It is not a deterrent to us,” the port official adds confidently.
GK Goh Research adds that the big picture under a master plan sees PTP being expanded in 10 phases over a period of 20 to 25 years. The port is expected to have 27 berths measuring 20 kilometres in total, with a total capacity of between 16 and 17 million containers.
This master plan, however, is subject to change and judging by the robust growth patterns at the port, may be altered accordingly. The initial suggestion was to have a five-phase expansion plan, however it has since been changed to 10 phases.
Other than getting customers from across the causeway to relocate, part of the plan includes targeting multinational corporations, assisting the companies to set up regional distribution centres in PTP.
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