We attended NCB’s 2Q15 analyst’s briefing, which was attended by about 15 analysts and fund managers. Postbriefing, we think that 2H15 might be more challenging for the Group in view of the anticipated slower growth in throughput volume, which will affect its ports operation business. Meanwhile, the loss-making logistics arm is also bracing for more headwinds due to the slowdown in economy activities. Potential synergy from the collaboration with MMC is still limited at this juncture. All in, we maintain UNDERPERFORM on NCB with unchanged Target Price of RM4.05 based on 1.3x PBV FY16E.

Healthy throughput growth. Revenue from port operations in 1H15 grew marginally by 3.7%, which is more modest as compared to the 8.7% growth in throughput volume (1H15:1.352m TEUs). We understand that the mismatch is due to the changes in volume mix whereby the gateway/transhipment mix has changed to 55%/45% from 60%/40% registered a year ago. Note that the gateway (import/export) commands higher tariff rate (c.64%) as compared to transhipment. However, lower fuel costs and maintenance costs lifted the PBT by 62.4% to RM50.6m. Moving forward, the Group expects 2H15 to be more challenging in view of the uncertain and volatile global economy outlook.

Challenging outlook for logistics. Despite initiatives including downsizing and cost rationalisation, logistics division recorded higher LBT of RM19.5m as of 1H15 from RM16.5m in 1H14. Management attributed the widened losses to the slowdown in oil & gas and infrastructure construction activities. The trucking division has also been downsized, which stopped the recurring operating costs but fixed costs were still incurred from the depreciation of equipment and vehicles. Moving forward, the Group aims to increase the utilization rate of haulage division to 90% from 75% currently while also planning to reduce the wastages and leakages by further rationalizing the operations. All in, the Group is still confident of a breakeven for the division in FY16, which is in line with our expectation.

No material synergy. We understand that a collaboration committee has been set up by NCB and MMC Corp, the major shareholder which has increased its stake to 30.1% in mid-July 2015. Currently, the interaction between the two parties is still limited to knowledge know-how sharing as well as personnel exchange program. Management revealed that the interface program linking to the Customs can be shared between the two parties, but we think that the cost savings are minimal. Meanwhile, the public shareholding spread of >25% has been accepted by Bursa Malaysia, but the Group will try to push the spread closer to a benchmark as advised by the authority.

Reiterate UNDERPERFORM with unchanged Target Price of RM4.05. Post-briefing, we made no changes to our earnings forecasts. Thus, we maintain our TP of RM4.05 based on unchanged 1.3x PBV FY16E. Share price’s performance was strong probably driven by its shareholder MMC Corp increasing its holding stake. However, we think that the chance of a General Offer (GO) is slim in view of MMC Corp’s high gearing, and thus the share price might normalize to match its fundamentals. 

Source: Kenanga Research - 27 Aug 2015