News  Yesterday, NCB announced the conclusion of a special auditor review on root causes of the problems with relation to the group’s significant loss and Prior Year Adjustment (PYA) registered by Kontena Nasional Bhd (KNB), for FY13.

 It was concluded that the significant loss and PYA were due to over recognition of revenue and under accrual of cost.

 Summary of findings are as follows: (i) Raising and recording of an invoice worth RM1.9m dated 29 Dec-10. The invoice was created without any apparent factual basis and its creation appeared to be based on instruction by someone within KNB’s senior management.

(ii) The tripartite transactions between KNB and two companies belonging to the same owner. These transactions were done to artificially inflate revenue. Interviews conducted have suggested that these transactions were created based on instructions of someone within KNB’s senior management.

(iii) The resultant financial statement of KNB involving revenue provisioning, concealment of expenses and liabilities were efforts to inflate revenue and suppress operating expenditures.

Comments  This announcement is not a major surprise to us as the group had accounted for the RM56.6m PYA in FY13 subsequent to the completion of their year-end audit but we are comforted that the root cause of the problem has been exposed and the worst could be over for KNB.

 Despite the neutral impact to the company, this announcement may have a negative impact on NCB’s public profile thereby affecting investors’ short-term sentiment on the stock. However, we believe that this could enable KNB to start over on a clean slate.

Outlook  Port segment is expected to continue being the main earnings contributor and further upgrade works on Wharf 8 could boost NCB’s ability to compete for more transhipment throughput as they could handle larger container vessels.

 We believe the worst is over for its logistics division and foresee narrowing of losses from this division in the coming quarters given that the management has taken steps to rationalise their logistics business.

Forecast  We maintain our forecasts and assumptions for now.

Rating  Maintain at Market Perform

Valuation  Our DCF-based TP is maintained at RM3.10. (Ke:7.88%, g: 1.00%)

Risks to Our Call (i) Further drop in market share of NCB in Port Klang’s total throughput (ii) Widening of losses in logistics division.

Source: Kenanga