QPH Finance Co. Pty Ltd. Ratings Affirmed At #BBB#; Outlook Stable

Stocks and Financial Services Press Releases Tuesday March 27, 2018 18:02
MELBOURNE--28 Mar--S&P Global Ratings

MELBOURNE (S&P Global Ratings) March 27, 2018--S&P Global Ratings said today that it had affirmed its 'BBB' issuer credit and issue ratings on Port of Brisbane's financing company QPH Finance Co. Pty Ltd. (QPH, together referred as PoB) and the port's related debt. The outlook on the long-term rating remains stable.

We affirmed the ratings on PoB to reflect the port's continued strong operations and financials, and favorable business outlook over the next two to three years. We forecast PoB's key ratio of funds from operations (FFO) to debt will moderate and remain in the range of 10.5%-11.5% (12.5% in the year ended June 30, 2017) over the next one to three years due to higher capital spending.

At the same time, we have revised the company's liquidity position to adequate from strong, given the large capital expenditure (capex) planned over the next 12 months. The large capex plan would lower the available rating headroom.

Underpinning PoB's strong competitive position is its position as the third-largest container port in Australia and the sole container and general cargo port serving Brisbane. It is the main gateway to Queensland and has a landlord business model that limits operational risk. Furthermore, the port has a good balance of import and export trade as well as passive rental income.

We forecast the port's trade revenue will increase by about 7% in fiscal 2018, driven by healthy volume growth and price increases linked to the consumer price index (CPI). Strong import volumes driven by the domestic construction sector and steady population growth will lift the port's revenues. Furthermore, import volumes of motor vehicles remain favorable because of the cessation of local production. Meanwhile, revenue associated with wet bulk volumes (including crude and refined oil) has increased after a decline in 2016.

Given that the State of Queensland has a relatively higher reliance on agricultural exports and commodity trade compared with other states, trade volumes could be volatile periodically. As a result, trade could moderate in the range of 3%-5% in the outer years.

Mitigating the potential trade volatility is the stabilizing effect of PoB's rental income. This is because the port's rental income is a significantly higher proportion of total revenues compared with those of NSW Ports. New revenue-generating property developments are underway and the leasing of new land should increase its property revenues by 3.5%-4.5% over the next two years.

Property leases at PoB are generally long term, with only a small proportion of lease revenue maturing within the next five years. Rentals are indexed to inflation or have a fixed increase of about 3%-4%. Moreover, lease rates are periodically rebased to property values and are contractually prevented from falling in adverse market conditions.

The port's large capital capex plans will moderate its FFO-to-debt ratio. We forecast PoB will maintain an FFO-to-debt ratio of about 10.5%-11.5% over the next two to three years and FFO cash interest coverage of about 3.0x (while revenue-generating projects remain in the construction phase). This is lower than levels in fiscal 2017 of 12.3% FFO to debt. The capex plans include the:

  • Ongoing port drive upgrade, which will provide dual carriageway access from the motorway to the port;
  • New property developments;
  • Wet bulk facilities;
  • A proposed cruise terminal; and
  • Other optimization projects.

Although PoB's intention of debt funding all of its capex will increase borrowings, we expect the level to remain in line with the current ratings. We expect its debt to increase by 33% to A$2.1 billion in fiscal 2020, from A$1.6 billion in fiscal 2019. Thus, PoB will likely pay all free operating cash flows as shareholder distributions. Due to the high capex trend over the next 3-5 years and the management's desire to maintain its current rating, we do not believe special dividends are likely.

The stable outlook on the port's financing arm QPH reflects our view that the port's strong market position and growth in trade volumes and property revenues over the next two to three years will maintain its steady business risk profile. The stable outlook incorporates our expectation that PoB will maintain its FFO to debt at or above 10% over the next two to three years.

The rating could face downward pressure if the company's financial metrics were to deteriorate beyond our expectations, such as its FFO-to-debt ratio sustainably declining to less than 9%. This could occur if shareholders seek increased short-term returns, the port undertakes a large debt-funded acquisition, or if a significant economic downturn occurs in Queensland that would likely affect trade volumes and potentially future property demand.

The port management's focus on shareholder returns limits the probability we would raise the rating. We believe the company will seek to manage its capital structure at the current rating level. An upgrade would likely be linked to PoB adopting a more conservative financial policy and maintaining FFO to debt at more than 13% over the next two to three years.

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