Despite feeling encouraged by the company’s restructuring plan after attending its analysts’ briefing last week, we make no changes to our UNDERPERFORM call on NCB with DCF-derived TP of RM1.83/share. Despite the anticipation of more details on the ultimate intention of MMCCORP (OP; TP: RM3.21) on its acquisition of 15.7% stake in NCB from MISC (UP; TP: RM7.49) in the briefing, the management did not reveal any further details on the deal as everything is still in preliminary stage. Moreover, the company does not discount the possibility of potential synergies between Northport and MMCCORP-owned Port of Tanjung Pelepas (PTP) and Johor Port in the long-run post the stake acquisition. On top of that, management also reiterated that they will proceed with the refurbishment of their ageing port facility to cater to container liners that are switching to larger vessels in general but the full impact could only be seen in 2016 when Wharf 8 refurbishment is completed.

Key highlights of the visit. Last week, we attended NCB’s analysts’ briefing in Northport, Port Klang. The management elaborated on its restructuring plans for the company amid strong competition from its neighbour, Westports. Besides the briefing, we also visited NCB port facilities to have a better picture of its operations.

Multiple changes needed in company. Due to intense competition and ageing port infrastructure, NCB has recently suffered declining throughput, which resulted in uninspiring earnings. In view of that, the company has embarked on restructuring plans involving the refurbishment of Wharf 8A with taller cranes to handle larger containerships. However, to maximize its full potential, NCB has to refurbish Wharf 8 (to be completed in 2016), which is located next to Wharf 8A to enable sufficient wharf length for the positioning of larger ships. Given ship sizes are expected to grow larger moving forward as ship owners have flocked to invest in larger ships to enjoy higher economies of scale, we believe the intention by NCB is rational, but we opine headwinds will still be present in the near-term as depreciation charges are expected to kick in as a result of higher CAPEX.

No light on ultimate intention behind MMCCORP deal. Post MMCCORP’s acquisition of 15.7% stake in NCB from MISC, the attendees of the briefing were keen to gather more information on the deal with regards to the main intention of MMCORP of this acquisition. However, the management is also unsure of MMCCORP’s ultimate intention at the moment and it is too premature to discuss further actions by the acquirer on NCB for the time being. Moreover, they have indicated that they could possibly capitalise on PTP’s robust client network and connectivity to add more value services for its clients through synergies. In our view, potential synergies from this deal remain vague until further actions are carried out by MMCCORP in the future.

Outlook remains gloomy, earnings forecast maintained. While we feel comforted that the management has put several measures in place to counter the issues it is facing, we maintain our slightly negative view on the company as the road to recovery remains challenging and uncertain, moving forward. Therefore, we did not factor in any potential recovery in throughput from its port refurbishment plans to stay on the conservative side. Meanwhile, we maintain our UNDERPERFORM call on the stock with a DCF-derived TP of RM1.83.

Source: Kenanga