Investment Highlights

• We maintain BUY for Bintulu Port (BiPort) with a higher DCF-derived fair value (FV) of RM6.02/share (from RM5.77 previously). The higher DCF stems from reducing our WACC to 9% from 10% previously due to the lower cost of debt of 6% (from 7% previously) with an unchanged terminal growth rate of 3%.

• Our FV implies a FY23F PE of 25x, 1.5 standard deviation above its 5-year average PE of 16x. There is no FV adjustments for ESG based on our neutral 3-star rating.

• BiPort’s 9MFY23 core net profit (CNP) of RM79mil was above our expectation but within street’s, accounting for 78% of our previous full-year forecast and 73% of consensus’.

• The above-expected result stems mainly from lower-thanexpected net interest charges due to a one-off adjustment from lease amortisation charges arising from Bintulu Port’s interim agreement with the state. Hence, we raise FY23F/FY24F CNP by 10%/ 12% on lower finance cost assumptions by bringing net interest charges down by 4% to RM64mil/RM74mil.

• This is partly mitigated with the lowering of FY23F revenue by 13% due to weaker volume for bulk cargoes in Samalaju Industrial Port (SIP). This is mainly due to key players like Press Metal and OM Materials overstocking inventories from 4QFY22. We also trim FY24F-FY25F revenue by a narrower 2%-4% to remain prudent given China’s slowerthan-expected economic recovery.

• Although BiPort does not have a dividend policy, the group has been generous to its shareholders with an average payout ratio of 55% from FY16 to FY22, except for only 15% in FY21 due to recognition of deferred tax asset of RM264mil which significantly widened its net profit.

• BiPort has declared a DPS of 3 sen for 3QFY23, bringing YTD DPS to 9 sen and 82% of our FY23F dividend, based on a payout of 50%.

• On YoY basis, 9MFY23 core net profit (CNP) decreased by 14% to RM79mil, primarily attributed to reduced revenue from both LNG and non-LNG cargo. LNG cargo throughput reduced by 2% due to lower exports to China and imports from key Asian market. Lower inbound and outbound cargoes (import of steel, export of timber, aluminium & manganese) from heavy industries in SIP caused dry bulk to decrease by 10% while break bulk decline 22%, contributing to a reduction in non-LNG cargo throughput by 11%.

• The decline was further intensified by higher finance cost of the 2-year interim lease concession for Bintulu Port (BP). In addition, BP only provided pilotage services to Brunei Darussalam Pilotage Services (DPS) in 9MFY23 in comparison to both towage and pilotage in FY22, which further impacted revenue. To note, the venture between BPSP and Brunei provided additional operating revenue of RM24.7mil in FY22.

• However, the 9MFY23 impact is partly mitigated by a lower effective tax rate of 25% from 30% in 9MFY22 stemming from recognition of deferred tax assets arising from origination and reversal of temporary differences from BP interim lease concession. Also, the impact was further cushioned by a 12% reduction in depreciation and amortisation as right-of-use assets on hired vessels for Brunei operation expired in 3QFY23.

• Sequentially, 3QFY23 CNP surged by 37% to RM32mil (from RM23.8mil in 2QFY23), driven by a revenue growth of 6% to RM187mil, attributed to increased handling of LNG cargoes. LNG segment, which constitutes 51% of 9MFY23 throughput, recorded a 2% QoQ increase as demand heightened towards the northern hemisphere’s winter season. In 3QFY23, BP’s LNG cargo throughput grew 5% QoQ to 10mil tonnes from 9mil tonnes in 2QFY23.

• Additionally, SIP’s sequential revenue growth in 3QFY23 stemmed from higher export activity for liquid bulk, as offshore facilities were fully operational after the infrastructure underwent maintenance in 1HFY23. SIP operates mainly non-LNG shipments, which recorded QoQ growth of 10% in 3QFY23. In 3QFY23, SIP achieved 9% cargo throughput growth to 1.58mil tonnes from 1.45mil tonnes in 2QFY23.

• Pretax margin rose to 24% 3QFY23 from 16% in 2QFY22 due to a positive net interest income for the quarter thanks to lower finance cost of RM8.3mil than RM34.8mil in the previous quarter, due to a lumpy adjustment to expenditure reclassification from lease amortisation under the BP interim arrangement.

• Looking ahead into 4Q2023, we are positive on LNG shipment demand ramping up as the northern hemisphere (including Japan, South Korea and China) enter the winter season. Also, LNG demand growth will be driven by Thailand’s falling domestic gas production. According to Reuters, Thailand’s LNG imports soared 25% YoY in October 2023. Hence, we are positive on a stronger 4Q2023 LNG revenue contribution.

• Bintulu Port’s concession expired on 31 December 2022 with the option to extend for another 30 years until 2052. The extension has been approved in principle. Ahead of finalising the new concession agreement between BiPort and Bintulu Port Authority, the first interim agreement was signed on 24 Nov 2022 to continue operating Bintulu Port for 6 months from 1 Jan 2023 to 30 June 2023. The second interim period has since been extended by 12 months from 1 July 2023, with a further extension option of 6 months until 31 December 2024.

• Pursuant to the Sarawak government’s intention to take over Bintulu Port under the state port from federal government, a special committee has been set up at a ministerial level to carry out an evaluation.

• We are optimistic on BiPort’s mid-term to long-term outlook due to:
  1) Potential tariff revisions by mid-2024F and implementation in stages starting from 2025F. To note, BP’s general cargo tariffs were last revised 39 years ago in 1983 while container tariffs raised 23 years ago in 1999.
  2) Bintulu International Container Terminal (BICT) benefiting additional container throughput from Sarawak Medical Innovation Technology Hub (SMITH) with expectations for the first medical glove container shipment by April 2024.
  3) Improving throughput prospects for SIP with Ocikumho commencing production of up to 100 kilotonnes per annum (kTPA) of epichlorohydrin (epoxy resin compound) in FY25 and Wenan Steel up to 5.7mil tonnes per annum (TPA) in FY26.
  4) Expected expansion of LNG operation by Petronas through a third floating LNG vessel nearshored in Sabah by 2027; and
  5) The construction of a new Royal Malaysian Navy base, the Naval Region 4 (MAWILLA 4) headquarters in Samalaju to enhance security and stability of Bintulu waters, hence attracting more potential investors to the region.

• Key risks are (i) delay in the new privatisation agreement, ii) macroeconomic and geopolitical uncertainties affecting LNG demand, and iii) port congestion which may depress throughput volume.

• The stock currently trades at a decent FY24F PE of 21x, below its 5-year peak of 23x.

Source: AmInvest Research - 27 Nov 2023