Period  2Q14/1H14

Actual vs. Expectations 2Q14 core net profit came in at RM2.8m, bringing its 1H14 cumulative net profit to RM7.6m. This is below our forecast and streets’ estimates, at only 17.6% and 9.3% of full-year FY14 forecasts, respectively. This is due to higher-than-expected drop in container throughput (1H14 YoY change: 14.8% drop as opposed to our assumption of 4.5% drop in throughput for FY14).

Dividends  An interim dividend of 2.0 sen declared for the quarter which is below expectations, accounting for only

33.3% of our full year DPS assumptions of 6.0 sen.

Key Result Highlights In 2Q14, core net profit plunged 40.8% QoQ mainly due to increase in depreciation cost coupled by a higher effective tax rate (2Q14: 56.3% vs. 1Q14: 47.3%). The higher effective tax rate could be due to the non-tax deductibility of depreciation costs thus leading to only 14.8% QoQ drop in tax expenses compared to 28.5% QoQ drop in PBT.

 On a YoY basis, 2Q14 core net profit stands at RM2.8m from a loss of RM5.7m due to significant narrowing of losses in the logistics division. (2Q14: -RM7.0m vs. 2Q13: -RM42.9m). This is partially offset by the negative impact of 12.6% YoY drop in revenue driven by 19.1% drop in throughput.

 In 1H14, core net profit registered a significant 74.1% drop YoY underpinned by: (i) increase in depreciation charges and (ii) 14.8% YoY decline in total container throughput handled.

Outlook  Construction is still ongoing in the wharf area of the port with Wharf 16 currently being upgraded to a multi-purpose wharf.

 In addition to the completed Wharf 8A, upgrading works on Wharf 8 will soon be initiated to cater for larger container ships owned by larger shipping lines.

 The logistics division will continue to rationalise its revenue stream and deployment of assets with nonprofitable revenue streams to be ceased. We believe the worse is over for this division and it will be in better shape moving forward.

Change to Forecasts We have cut our earnings forecasts for FY14 and FY15 by 58.4% and 69.2%, respectively, by adjusting our container throughput growth rate assumptions for FY14 and FY15 downwards to -11.5% (from -4.5%

previously) and 3.0% (from 5.5% previously) for the respective years. Consequently, our FY14 DPS assumption is reduced to 3.1 sen.

Rating Downgraded to UNDERPERFORM from MARKET PERFORM

Valuation  Our DCF-derived TP is reduced to RM2.07 from RM3.10 based on similar risk factors as a result of the cut in earnings forecasts. (Ke: 7.88%, g: 1.00%)

Risks to our Call (i) Faster than expected recovery in container throughput

 (ii) Delay in upgrade works on Wharf 16 and 8

Source: Kenanga