While BIPORT’s 1Q17 results were mostly positive, we deemed it to be broadly within expectations as we foresee a weaker 2H17, factoring in potential losses from the upcoming Samalaju Port, which is set to commence full operations next month. With that said, we expect Samalaju to grow out of its gestation phase and achieve meaningful volume in 2-3 years’ time. No significant changes in earnings forecasts were made. Downgrade to MARKET PERFORM, with a lower TP of RM6.60, after rolling-over our valuation year and updating our WACC assumptions to better reflect current market levels.

Deemed broadly within expectations. Coming in at 34% of our FY17E forecast, we deemed BIPORT’s 1Q17 net profit of RM50.6m to be broadly within expectations, as we expect a weaker 2H17, factoring-in potential losses arising from Samalaju Port’s initial gestation phase, which is set to commence its full operations in June 2017. The announced interim dividend of 6.0 sen per share was within expectation.

Stronger YoY. 1Q17 net profit grew 26% YoY from RM40.1m in 1Q16, contributed by (i) higher operational revenue of RM161.1m in 1Q17 by 13.5% from RM141.9m previously, due to better LNG, Bulk Fertiliser, Alumina, Container and Ferro-alloy cargo volumes, coupled with (ii) lower finance costs (fell by 12% from RM7.2m to RM6.4m), and depreciation expenses (down 11% to RM7.2m from RM8.1m).

Sequentially positive as well. Despite having recorded lower operating revenue by 3% from RM166.1m in 4Q16, arising from lower volume handled for LNG, General Cargo, Crude Oil, Petroleum Products and Bulking Services, 1Q17 net profit improved QoQ 17.2% from RM43.2m in the preceding quarter, mainly due to RM11.62m consultancy cost being recognised in 4Q16.

Samalaju a longer-term prospect. The upcoming Samalaju Port is expected to commence full operations in June 2017. We expect this to be a longer-term prospect, positioned to ride on the development of the Sarawak Corridor Renewal Energy (SCORE). Having said that, we expect Samalaju to undergo losses initially, dragged down by fixed depreciation and amortisation costs, with the port expected to achieve meaningful utilisations only in 2-3 years’ time. Meanwhile, secured contracts in FY16 to offer base support services are expected to provide some visibility towards its non-cargo revenue for the next 3-5 years, while Petronas’s new LNG Train 9 is also set to increase yearly LNG production capacity to 29.3m tonnes.

No significant change to earnings. Despite this set of positive results, we are keeping our forecasts mostly unchanged, as we expect 2H17 to be weaker once losses from Samalaju Port are factored in. Post-model update, we tweaked our FY17-18E earnings forecast only marginally by +0.1-1% for housekeeping purposes.

Downgrade to MARKET PERFORM. We lowered our DDM-derived TP to RM6.60, from RM6.78 previously, after updating our WACC assumption to 5.2%, from 5% previously, post-adjustment of our market risk premium assumptions to better reflect current levels, while also rolling-over our valuation year to FY18. Following that, we downgraded our call to MARKET PERFORM, with BIPORT showing no immediate signs of any earnings growth catalysts in the near-tomid-term at this juncture. Risk to our call includes (i) lower-than-expected losses contribution from Samalaju Port, and (ii) higher-than-forecasted cargo volume throughput growth.

Source: Kenanga Research - 24 May 2017