On track. Samalaju Port's development is on track, with the construction of its two-barge berths and a Ro Ro ramp targeted to be completed by June 2013, before the completion of the port's first phase in 2016. Bintulu Port is allocating an initial capex of RM193m for the two barge berths. While the combined development could exceed RM1bn, the bulk of its capex will be used for land reclamation and dredging the water depth deeper from 7m-12m, in order to cater to Panamax vessels' requirements. The barge berths will be
able to handle a capacity size of 4m tonnes p.a. Phase 1 of Samalaju's development, which is expected to complete by 1Q16, will see an additional three Panamax berths and one barge berth and an additional capacity of 14m tonnes. Upon completion of Phase 1, Samalaju will be able to accommodate a combined capacity of 18 million tonnes.

Capital structure and concession terms. Management will announce the concession terms from Samalaju Port in due course. The capex funding is understood to be from bond issuances, in addition to Bintulu Port receiving a RM500m grant from the federal government.

Ongoing negotiations. The long-drawn negotiations on tariff reduction for LNG berthing and annual leases are still inconclusive. At the same time, management is also lobbying for tariff increases for both Bintulu and Samalaju ports to cushion the decline in revenue from LNG berthing. Management expects a solution to be reached by the end of the year. There are indications of a revenue downside of RM50m from the c. 17% reduction in LNG berthing tariffs, but this may be offset by a c. 20% jump in revenue of RM20m arising from the cuts in rental and port tariffs. Despite the reductions, management intends to maintain the current dividend payout.

Cargo flow. As only two barge berths will be completed by mid-2013, cargo flows into Samalaju Port will mostly be via barges, and Bintulu Port will act as an import and export hub of raw materials and finished goods respectively with truck haulage also playing a major role in moving cargo on land. Samalaju's need for industrial cargo throughput in the near term (by 2014) is expected to be in the range of 8m tonnes and roughly 30,000 TEUS of imports. Exports are expected to see an annual throughput of 3.5m tonnes and 45,000 TEUS, which is smaller in tonnage size as most of these finished products are high-value goods. The combined import and export tonnage from Samalaju's development alone is expected to handle up to 14m-15m tonnes and 100,000 additional TEUS per annum by 2015. We understand that that Bintulu Port will continue with container handling in the immediate and longer term as management wishes to avoid any duplication. Come 2016 and upon the completion of Phase 1, the cargo flow from Samalaju will mostly shift to Samalaju Port as its berths can accommodate Panamax vessels.

Maintain NEUTRAL. While we like Bintulu Port's prospects, there are still uncertainties in relation to its tariff negotiations and the concession agreement for Samalaju Port. We maintain our NEUTRAL stance on Bintulu Port, with an unchanged FV of RM7.10, based on DDM at 7.5% required return.

Source: OSK