The overall poorer 1Q18 results came in broadly within expectations, dragged by losses from Samalaju Industrial Port, coupled with lower LNG volumes in the existing Bintulu Port. Moving forward, we expect FY18-19 earnings to be weaker due to the aforementioned factors, with Samalaju expected to break even only in FY20 or beyond. Maintain MARKET PERFORM with revised TP of RM5.85.

Broadly within expectation. 1Q18 net profit of RM31.2m is deemed broadly within expectations, coming in at 20% of our full-year forecast. The announced dividend of 4.0 sen per share (versus 6.0 sen in 1Q17) is also broadly within expectation.

Overall poorer results. YoY, net profit plunged 38%, mainly due to new Sukuk expenses of RM12.5m, coupled with increased total amortisation expenses by 35% - both attributed to Samalaju Industrial Port, which commenced operations in 2H17, in addition to poorer performance from existing Bintulu Port (port’s PBT dropped 15% YoY) due to lower LNG vessel calls. Despite so, group operational revenue improved 4% YoY, thanks to new revenue from Samalaju Industrial Port, which offset Bintulu Port’s revenue deterioration of 13% YoY.

Sequentially, net profit also plunged by 29% QoQ, attributed by a higher effective tax rate of 32% versus 17.5% in 4Q17, coupled with the aforementioned weaker performance from Bintulu Port (port’s PBT dropped -15% QoQ). Group operating revenue also dropped 10% QoQ, in line with Bintulu Port’s revenue deterioration by 13%, offsetting Samalaju Industrial Port’s revenue improvement by 10%.

Weaker earnings expected for FY18-19. Given the weaker LNG volume outlook for the year, we expect the existing Bintulu Port to post weaker earnings in FY18. Additionally, FY18 would also see the full- year impact of losses from Samalaju Industrial Port, which commenced operations in 2H17, dragged by fixed costs such as: (i) depreciation and amortisation costs from the RM1.9b development, (ii) expenses from the RM950m sukuk to fund the development, and (iii) RM4.7m per year land lease included in the concession agreement. Nonetheless, we are expecting breakeven for Samalaju Industrial Port in FY20 or beyond, driven by development growth of Samalaju Industrial Park.

Maintain MARKET PERFORM, given the lack of any rerating catalysts, while dividend yield remains decent at c.4%. Post-model update, we trimmed our FY18-19E earnings by 4-3%, after fine-tuning our borrowings costs and amortisation assumptions. Our DDM-derived TP is lowered to RM5.85, from RM6.10 previously, after rolling forward our valuation base year to FY19. Our DDM valuations are based on the assumptions of: (i) 5.9% discounting rate, and (ii) 1% terminal growth.

Risks to our call include: (i) higher-than-expected dividend payout, (ii) higher-than-expected volumes in Bintulu Port, and (iii) lower-than- anticipated losses from Samalaju Industrial Port.

Source: Kenanga Research - 28 May 2018