We believe HARBOUR is a compelling logistics play in the growing local East Malaysian market given the group is well-poised to benefit from the Sarawak Corridor of Renewable Energy (SCORE) initiative with Samalaju Industrial Park, which is one of the target areas of SCORE that will see significantly higher economic activities moving forward. HARBOUR has also made its maiden venture into mixed commercial and industrial property development with a potential GDV of RM1.0b @ ASP of RM250 psf on a prime land situated within proximity to Bintulu Port. The Phase 1 (worth RM120.0m) is well-received with take-up rate of 60%. In addition, we opine that its engineering division may also benefit from more EPCC contracts to be awarded subsequent to the final approval of the massive USD27b Refinery and Petrochemical Integrated Development (RAPID) project in Pengerang, Johor. We are initiating coverage on the stock with an OUTPERFORM call at a target price of RM2.20/SoP share.

East Malaysian logistics company. With their roots tracing back to 1975, HARBOUR currently provides a comprehensive range of services ranging from warehousing, transportation, air, sea and land freight to heavy haulage, mechanical erection/ installation, ship chartering, supply-chain management and other specialized industrial logistical support services and they have significant exposure in East Malaysia.

Perfect proxy to SCORE. HARBOUR is expected to benefit significantly from the expected vibrant economic activities driven by the SCORE initiative as spearheaded by the state government. Delving deeper into the issue, Samalaju Industrial Park, which is situated in Bintulu, is one of the green fields earmarked to be developed under SCORE, is expected to create more opportunities for HARBOUR as there will be higher demand for logistics services for project cargo and also other types of cargo. Adding to that, the development in that area will also have spillover effects on overall economics of the areas near Samalaju.

Maiden property development project with estimated GDV of RM1.0b. HARBOUR has plans to develop a 130 acres land with into a mixed commercial and industrial zone with a potential GDV of RM1.0b spanning over 10 years. The project is expected to generate strong margins (>60.0% gross margin) due to their low land cost with land and construction cost expected to constitute only 6% and 50% of GDV, respectively. Response from buyers has been encouraging so far with 60% take-up rates for the 1st phase of the project launched, which is estimated to be worth c.RM120m. Assuming 40.0% pre-tax margin, it could contribute RM48.0m to the group in FY16.

Let bygones be bygones, look to the future … In FY13, the group’s earnings took a hit (¯ 75.0% YoY) due to an RM25.6m impairment of intangible assets as the company took the opportunity to rid its accounts off the excess baggage. We take this as a positive move as this results in minimal intangible assets on the balance sheet which leaves little room for further impairments. On the other hand, earnings are expected to gather steam with an expected 2-year CAGR of 7.3% mainly driven by: (i) 7.4% 2-year expected CAGR in logistics division revenue due to new 3PL warehousing contract secured and Petronas Train 9 Project for Bintulu and (ii) 10.1% CAGR in engineering division driven by stronger expected orderbook replenishment.

Still not too late … Despite recent strong showing of the share price, we believe that it is still not too late to take a position in this stock. We arrived at a target price of RM2.20 based on SoP valuations implying a forward PER of 11.5x based on FY15 earnings. Further rerating catalysts for the stock include: (i) stronger-than-expected property price movement in Bintulu and (ii) bigger-than-expected contract size of EPCC contracts. Thus, we are initiating coverage on the stock with an OUTPERFORM call.

Source: Kenanga