Riding on the SCORE wave. As a comprehensive logistics provider in East Malaysia, HARBOUR is capitalising on the rising economy activities in Sarawak on the back of the Sarawak Corridor of Renewable Energy (SCORE) initiative. As a result, its net profit recorded 3-year CAGR of 36.3% to RM33.4m in FY14 while another recordbreaking year is on track with net profit of RM36.5m (+76.3%) chalked up for 9M15. However, we opine that the company is undervalued considering its strong earnings potential as well as its long established position as a major logistics provider in East Malaysia with its proven track record.

Samalaju to drive logistics progressively. Logistics services and machineries, the bread and butter business contributed >60% to the Group YoY PBT growth of 51.6% as of 9M15. The Group attributed the overwhelming growth to the higher utilisation of heavy machineries as we understand that the construction of RM1.8b Samalaju Industrial Park is now 40% completed and is scheduled to be completed by 2017. Thus, we expect the division growth to be underpinned by the project with the construction progress poised to accelerate according to the S-Curve dynamic. We project the division’s PBT to grow 30.6% in FY15E and 12% in FY16E, which is in line with the management guidance. We foresee the division to continue to be the core business of the Group despite business diversification. Hence, we expect the robust earnings growth in the division to drive HARBOUR forward.

Cautious on Engineering & Construction. HARBOUR is also involved in civil/ infrastructure works and EPCC (Engineering, Procurement, Construction and Commissioning) services, which are related to the Oil & Gas sector. 9M15 PBT contribution from the division surged 85.7% to RM13.1m thanks to the recognition of superior margin from the project-in-hand with an outstanding order book of ranging RM40m-RM50m or 0.64x-0.68x of FY14 revenue. The Group is cautious on order book replenishment moving forward in view of the weakness in oil prices, while the contract terms for future projects secured, if any will also be less attractive but the Group will opt to be selective based on the profitability. With that, we ascribed a conservative valuation of 6x to the division, implying 25% discount from small-cap oil and gas companies.

Property development, the double-edged sword. The Group’s maiden foray into property development will bear fruit in FY16. Phase 1 and Phase 2 of Kidurong Gateway (total GDV: RM1b) has generated sales of RM84.1m while the construction works will be completed by end-FY15. Thus, HARBOUR will recognise the profit in FY16 and we estimate the operating profit contribution from the division to amount to RM17.2m (51% stake). Subsequent to that, the Group is also aiming to launch its Phase 3 in FY16 with estimated GDV of RM70m. Undoubtedly, the property division can provide the impetus to the Group earnings growth, but we are also wary on the potential sector de-rating to take the associated risk into account. As such, we apply 60% discount to our RNAV valuation on this division.

Earnings growth to further excite. Moving forward, we are projecting 53.3% and 22.9% net profit growths, respectively, in FY15 and FY16 driven by its strong logistics division. Meanwhile, earnings from the property development division are expected to be recognised in FY16 upon the completion of construction, which we estimate to be RM11.1m in net profit. Furthermore, the Group is now in net cash position and we believe it will lead to higher dividend payout of c.20% in FY15 and FY16, which translate into DPS of 6.0 and 7.0 sen, respectively.

Trading Buy with Fair Value of RM3.15. Our FV is based on Sum-of-Parts (SoP) valuation (refer to valuation table), implying 9.1x PER FY16E or 11.8x PER FY16E exproperty earnings. The valuation appears fair as compared to the 12.5x PER we ascribed to logistics companies under our On Our Radar (OR) coverage, namely TASCO (TB; FV: RM5.41) and CENTURY (TB; FV: RM1.19). As compared to FBM Small Cap Index Fwd PER (same financial period) average of 9.6x, HARBOUR’s premium is <25% which we deem justifiable in view of its strong earnings growth and proven track record.

Key risk: (i) Slowdown in property market, (ii) Failure in replenishing Engineering order book, iii.) Changes in political environment in East Malaysia.

Source: Kenanga Research - 18 Jun 2015