News  Samalaju Port Sdn Bhd, a wholly-owned subsidiary of BIPORT, has issued the Letter of Acceptance, to a JV named Pekerjaan Piasau Konkerit Sdn Bhd – CHEC Construction Sdn Bhd for the construction and completion of Samalaju Port Development project at Samalaju.

 The contract awarded is worth c.RM311m consisting of a wharf and associated works package for the Phase 1 of the project with an expected duration of 27 months.

Comments  We were not surprised by the news given that development works are already ongoing at the Samalaju Port. Assuming project tenure of 27 months, c.RM11.5m will be spent each month.  This is within our estimated CAPEX of RM300m for 2013.

 We are positive on the contract award as this signals that the Samalaju Port project is well on track which in the long-term is expected to be the main growth driver for BIPORT. The new port may also provide some business diversification in terms of cargo type handled by BIPORT as currently a large part of the cargo handled in Bintulu Port are LNG cargoes. The main cargo type that Samalaju port is expected to handle is bulk cargoes consisting of coal, manganese ore and alumina.

Outlook  According to management, the throughput contribution from Samalaju Port will be insignificant in the near term and they expect the throughput contribution to amount to 4.9m MT/year, possibly in 2016.

 Currently, two companies have commenced operations there and more companies’ plants are expected to come on stream next year.

 Phase 1 of Samalaju Port is expected to be completed only in 2Q16 and we believe that BIPORT’s earnings could be hit in the first year when it commences the port operations and we believe that it could take more than one year to break even.

 Overall, we are still positive on the long-term prospects of the project and we have not factored in impact from Phase 1 of the project pending more clarification from the company and confirmation of commitment by companies that may operate in the Samalaju Industrial Park in the future.

Forecast  We maintain our forecasts and assumptions.

Rating  Maintain UNDERPERFORM

Valuation  Our DCF based target price is maintained at RM6.98/share. We maintain our UNDERPERFORM call as we believe that the current valuation appears lofty and though we are positive on Samalaju project, earnings might even be hit slightly when Phase 1 of the project comes on stream due to higher expected fixed costs from the Samalaju Port.

Risks to Our Call (i) Better-than-expected port and bulking division activities, and (ii) Earlier-than-expected completion of Phase 1 of the Samalaju Port project.

Source: Kenanga