Outlook will be challenging for the Group due to the slowing economic activities in East Malaysia and persistent poor property market conditions. Although there could be some wildcards to support growth, we are closing our position on HARBOUR with FV of RM1.870 (Ex-1:10 bonus and 2:1 share split FV of RM0.850). It was previously a Trading Buy with Cum/Ex TP of RM3.150/RM1.432.

For FY16, the Group’s net earnings increased by 8.5% to RM56.2m (vs RM51.8m in FY15) accounting for 89.2% of our forecast. At PBT level, the Group’s performance was dragged down by poor performance of shipping and marine services as well as logistics and equipment segments, which fel 68.4% to RM2.6m and 17.3% to RM40.6m, respectively. PBT from engineering work segment grew by 10.5% to RM15.6m in FY16. Property development PBT grew by 828.2% to RM49.1m.

1Q17 Group revenue decreased by 2.9% to RM111.9m which led to lower PBT by 11.33%, RM12.7m vs. RM14.4m in 1Q16. This is mainly due to weak performance in logistics and engineering works segments.

Facing contraction in engineering and logistics works. In 1Q17, logistics services registered a PBT of RM6.4m, -4.3% YoY vs. RM6.7m in 1Q16. The segment was affected by slow economic activities in East Malaysia due to low commodity prices. Despite the Group having replenished their engineering order-book by RM25.0m in 1Q17, we view that management wil not be able to match last year’s performance because of the scaled-down capital expenditures for oil and gas companies. Engineering work division registered PBT of RM0.1m, -99.0% YoY in 1Q17 vs. RM4.9m in 1Q16.

Three new additional vessels. We expect to see some improvements in shipping and marine segment due to higher volume of cargo resulting from three newly purchased vessels, adding to five existing vessels. In 1Q17 PBT coming from shipping and marine segment grew by 256.8% to RM5.1m. However, the upside could be limited by intense competition and oversupply in shipping and marine services market.

Phase 3 of Kidurong Gateway could be the wild card. Earnings from the property development division are likely to trend weaker given that the Group has recognized its profit generating from completed Phase 1 and Phase 2 of Kidurong Gateway. Subsequently, HARBOUR will only recognize new earnings if they are able to sell the remaining 20% of unsold units from Phase 1 and Phase 2, which are estimated to be valued around RM50.0m to RM60.0m. However, if there is any sign of recovery in the property market the Group may proceed with the launch of Phase 3 of the development which will comprise of high-rises and commercial shop lots. The remaining GDV of development is about RM100.0m and this could boost HARBOUR’s earnings in FY17. We took a conservative view for the launch of Phase 3 as it may not materialize in the mid-term.

Subdued earnings ahead. For FY17/F18, we forecast lower earnings by 27.8%/4.1% of RM40.6m/RM38.9m due to lower income in most segments and uncertainties from the property development division. Logistics services segment is likely to be the major contributor to the Group’s PBT as we estimate the segment to contribute 38.7%, followed by engineering work a 11.0%, shipping and marine at 4.7%, and the remaining from property development segment. This should translate to FY17/FY18 PATAMI EPS o 10.1 sen/9.7 sen. We assume FY17/FY18 dividend pay-out ratio o 23.5%/26.7% following the 3-year average and this translates to DPS of 2.4 sen/2.6 sen. This is in line with management guidance of slightly higher dividend in FY17 vs 2.0 sen in FY16.

We are closing our position in HARBOUR with NOT RATED call at Fair Value of RM1.870 (Ex-1:10 bonus and 2:1 share split FV of RM0.850) derived based on our SoP valuation on the Group’s core business segments, implying a 8.4x FY17E PER.

Source: Kenanga Research - 7 Feb 2017