Period  2Q14/1H14

Actual vs. Expectations  INTEGRA’s 2Q14 results came in at RM7.7m, bringing its cumulative 1H14 results to RM17.1m. This is below both our and consensus expectations at 39.3% and 38.6%, respectively. We believe the variance is due to: (i) lower-than-expected Lekir Bulk Terminal (LBT) throughput growth (-18.6% YoY vs. our assumption of 6.0% YoY), and (ii) higher operating cost in Lumut Maritime Terminal (LMT) post the electricity tariff hike.

Dividends  As expected, no dividend was declared for the quarter.

Key Result Highlights Core net profit in 2Q13 declined 18.4% QoQ despite a 1.4% uptick in revenue due to: (i) lower contribution from its associate LMT caused by higher electrical costs, and (ii) higher operational costs.

 On YoY basis, core net profit for the quarter dipped 18.4% underpinned by: (i) drop in LBT throughput YoY (-18.6%), (ii) weaker LMT contribution, and (iii) higher depreciation costs.

 In 1H14, core earnings decreased by 14.2% YoY driven by the: (i) drop in LBT throughput caused by lower coal demand from TENAGA (OP; TP: RM13.77), and (ii) lower share of associate profits from weaker LMT performance.

Outlook  TNBM5 deal still undergoing negotiations with TENAGA. INTEGRA is still negotiating the terms and conditions for TNBM5 project. Given their excellent track record in dealing with TENAGA for the past 10 years, a favourable outcome is highly likely.

 M4 power plant to commence in 2H14. With the arrival of the new grab ship unloader (SUL3) at LBT, operations are targeted to commence in 2H14. This might help to offset the potential decline in LBT throughput in 2H14.

 Still courting VALE. INTEGRA is still in talks with Vale on their level of participation in its project to set up a transhipment hub and pelletization plant in Teluk Rubiah. This could propel INTEGRA to become one of the main bulk transhipment hubs in the region in the future.

Change to Forecasts We have tweaked our LBT throughput growth assumptions downwards to -2.0% (from +6.0%

previously) for FY14 while maintaining 4.0% throughput growth assumption for FY15. Moreover, we have also adjusted our net margin assumptions for its associate, LMT to 28.0% (from 32.0% previously) for both FY14 and FY15. As a result, our core earnings forecast for FY14 and FY15 has been cut by 11.1% and 4.0%, respectively.

Rating Maintained at MARKET PERFORM

Valuation  As we roll over our DCF valuation to CY15, our target price is increased to RM2.41 from RM2.32 previously. (WACC: 11.1%, g: 2.0%)

Risks to our Call (i) Delay in M4 Power Plant project; and (ii) Higherthan-expected operating cost of LBT and LMT.

Source: Kenanga