NCB Holdings Berhad (NCB) is one of the two players in Port Klang, predominantly handling Import/Export and Transshipment container cargoes. Recent years have not been good for NCB as its profits have been declining over the past two years with losses from Kontena Nasional due to cost mismatch coupled with declining port throughput growth. To mitigate these problems, NCB has multiple plans in place, which involves upgrade works on Wharf 8 and 8A to enable handling of larger container vessels and rationalise their loss-making logistics arm. Notwithstanding, we have only factored in conservative 2-year CAGR of 12.4% from FY13 to FY15 as we opine that substantial recovery in throughput will take years. Thus, we initiate coverage with a MARKET PERFORM call with a TP of RM3.10 based on DCF valuation, which could potentially be re-rated if recovery is stronger than expected.

Operator of Northport in Port Klang. Besides Westports, NCB operates the Northport and Southpoint in Port Klang, which mainly handles Import/Export and Transshipment container traffic. On top of that, it also wholly owns Kontena Nasional Sdn Bhd, which provides integrated logistics services namely freight forwarding, warehousing, customs brokerage, container haulage and contract logistics with core clients being government agencies and oil and gas companies.

Earnings bogged down by logistics arm’s weak container traffic handled in Northport. Despite an uptrend in revenue over the years, NCB’s earnings were adversely affected by its logistics arm in particular, Kontena Nasional, which saw a loss of RM74.1m in FY13 due to several loss-making contracts undertaken by the group. Container throughput handled by NCB is also on a declining trend due to its ageing port facility. To counter these issues, NCB has embarked on a strategy to rationalise their logistics businesses to stem losses and revamp their port facilities to cater for the more demanding container transport market. Post the upgrading works on Wharf 8A, NCB will have an additional capacity of 600,000 TEUs and 17m water depth, which empower them to handle larger container vessels.

Earnings expected to recover modestly, but still a long way to optimal utilisation. Driven by its port infrastructure upgrade plans and rationalisation of its logistics arm, the core net profit of the group is expected to grow at a 2-year CAGR of 12.4% from FY13 to FY15 albeit profits are expected to be marginally offset by higher depreciation and amortisation costs from incremental CAPEX on Wharf 8A, 16 and 8 upgrading works. We believe that there is still a long way to go for Northport to reach its optimal level of container terminal utilisation with 50% utilisation rate expected in FY14 compared to the ideal 80% utilisation for profit maximisation.

More sustainable recovery needs to be shown, initiate with a MARKET PERFORM call. All in all, we are feeling positive on NCB’s initiatives to improve its business operations, but we believe there is more need to be proven by the group and a significant improvement in earnings seen for a re-rating of the stock. We are initiating coverage on this stock with a MARKET PERFORM call and a TP of RM3.10/DCF share. In our valuation model, we have imputed 6.0% YoY growth of Free Cash Flow to Equity (FCFE) in the first stage of valuation (CY15-CY20) and a terminal growth of 1.0% for 2nd stage terminal valuation. We remain neutral on stock in the near-term and investors should monitor this stock for its long-term sustainable recovery in earnings.

Source: Kenanga