We deemed 1H17 net profit of RM74.4m as below expectations in anticipation of a weaker 2H17 due to losses from Samalaju Port, which had just commenced operations in June 2017. Likewise, we also believe the port to be a longer-term play, underpinned by the growth of the Samalaju Industrial Park. In the meantime, LNG vessel calls and cargoes will still be the main earnings contributors for the group. We trimmed our FY17-18E earnings by 9% following the results disappointment. Maintain MARKET PERFORM with lower TP of RM6.05.

Deemed below expectations. Despite coming in at 49% of ours and consensus forecasts, we deemed 1H17 net profit of RM74.4m to be below expectations as we anticipated a weaker 2H17 due to higher expenses arising from the commencement of Samalaju Industrial Port. Absence of dividend was also unexpected, with YTD DPS so far at 6 sen, versus 1H16 of 12 sen and our full-year forecast of 23.0 sen.

Weaker YoY from higher tax; stronger at PBT-level. Coming in at RM23.8m, 2Q17 net profit declined 21% YoY from RM29.9m in 2Q16, mainly due to a higher effective tax rate during the quarter (41% vs 20%). On the PBT-level, 2Q17 improved by 9% from RM37.3m to RM40.6m, in-line with a 13% operating revenue growth from better LNG, container, bulk fertiliser and other miscellaneous services. Cumulatively, 1H17 net profits improved 6% from RM70.1m in 1H16, heavily contributed by a strong growth of 26% YoY in 1Q17. Cumulative revenue improved healthily as well by 13%, from RM297.1m to RM315.4m, from the abovementioned reasons, coupled with better ferro-alloy cargo in 1Q17.

Sequentially much weaker. Comparing QoQ, 2Q17 came in seasonally weaker by 53% from RM50.6m in 1Q17, attributed to: (i) significantly higher staff costs (+54%) from yearly bonuses and increments during the quarter, (ii) new sukuk expense this quarter of RM3.5m, and (iii) lower operating revenue by 4%, from decreased LNG, alumina, general cargo and container volumes at Bintulu Port.

Samalaju a longer-term prospect. With Samalaju Industrial Port just recently commencing full operations in June 2017, we expect this to be a longer-term prospect play, with its outlook closely dependent on the growth of the Samalaju Industrial Park. Having said that, we expect Samalaju Port to post losses during its current early phases, dragged down by fixed costs, such as: (i) depreciation and amortisation costs from the RM1.9b development, (ii) expenses from the RM950m sukuk raised to fund the development, and (iii) RM4.7m per year land lease included in the concession agreement. In the meantime, handling of LNG vessel calls and cargoes at Bintulu Port is still expected to remain as BIPORT’s main earnings contributor.

Maintain MARKET PERFORM, with lower TP of RM6.05. With this set of disappointing results, coupled with an anticipated weaker 2H17 due to losses from Samalaju, we trimmed our FY17-18E earnings forecasts by 9%. Following the earnings cut, our DDM-derived TP was also lowered to RM6.05 (from RM6.60 previously). We also made no changes to our valuation assumptions of: (i) WACC of 5.2%, and (ii) terminal growth of 1% from FY26 onwards. Risk to our maintained call includes (i) higher-than-expected losses contribution from Samalaju, (ii) lower-than-forecasted LNG handling volumes, and (iii) lower-than-expected dividend pay-out.

Source: Kenanga Research - 25 Aug 2017