We initiate coverage on Bintulu Port (BIPORT) with an OUTPERFORM rating and DCF-derived TP of RM5.95. Its resilient earnings are fuelled by long-term Petronas supply contract and strongly-backed industrials investors. Furthermore, it is also a dedicated inter-connected port operator with strong government-linked shareholdings support (Petronas and Sarawak State).

Diversifications are in place. BIPORT is looking to reduce reliance on LNG business with no further capacity expansion as hinted by Petronas. All in all, BIPORT’s core business will still be spearheaded by LNG business (49% of the group revenue), with future growth to come from Samalaju Industrial Port (20% of the group revenue), and the balance driven by various non-LNG cargo & container, and crude palm oil (CPO) bulking services (6% of the revenue).

LNG driven by Petronas. There are currently three plants, MLNG 1, 2, and 3 with a total capacity of 29.3m tonnes (currently at 80% utilisation) driven by long-term Petronas contracts extending as far as 20 years for the supply of LNG to Taiwanese, Japanese and Korean utilities companies. Petronas is expanding through alternative distribution channel using LNG ISO Tanks (counted as 2 TEUs per tank) through partnership with Tiger Gas Group (China).

Dedicated port for Samalaju Industrial Park. Currently there are six investors including Sakura Ferroalloys, Malaysian Phosphate Additives, Pertama Ferroalloys, OM Holdings, Press Metal Bintulu and OCIM. Recently, another huge investor came in, namely Wenan Steel (Malaysia) SB which is set to become a major steel manufacturer in the ASEAN region. Going forward, these industries will help to drive Samalaju Industrial Port’s growth, with breakeven seen by 2025.

Banking on Sarawak palm oil sector. Under bulking services, BIPORT handles almost 95% of Sarawak palm oil products with an integrated and connected terminal operated by Wilmar Group’s Bintulu Edible Oil, Sime Darby’s Austral Edible Oil, Sarawak Oil Palms’ SOP Edible Oil, Kirana Edible Oil and Borneo Edible Oil utilising all the 154,600 metric tonnes (MT) tank capacity at Biport Bulkers Sdn Bhd (6% of the revenue).

Vying for a better lease/ tariff term. Bintulu Port are currently in final discussion with the Federal Government to extend its concession agreement for another 30 years starting 1st January 2023 with a better lease term and tariff structure comparable to the industry rate. There has been no revision since 1993. Currently, Bintulu Port container tariff are significantly lower by 38% compared to Samalaju Industrial Port.

Double-digit earnings growth. We are projecting FY22F/FY23F earnings of RM112.3m/RM141.5m (implying +14%/26% growth) riding on long-term LNG supply contracts, resilient non-LNG cargo and container traffic as the biggest Sarawak port operator with strong volume growth driven by the Samalaju Industrial Park (seven strongly-backed investors). Furthermore, Samalaju Industrial Port have unutilised RM1b in Investment Tax Allowance (ITA) which could bring its effective tax rate lower and further grow its earnings beyond the current level.

Initiate coverage with OP with a DCF-derived TP of RM5.95 based on a discount rate equivalent to a WACC of 5.8%, and a terminal growth rate of 2%. There is no adjustment to TP based on ESG of which it is given a 3-star rating as appraised by us. We like the stock for its: (i) resilient earnings riding on long-term Petronas supply contract and strongly-backed industrials investors, and (ii) strong government-linked shareholdings support (Petronas, and Sarawak State).

Risks to our call include: (i) significant deterioration in cargo/container through-put, (ii) weak macroeconomic condition, and (iii) delayed concession extension.

Source: Kenanga Research - 9 Aug 2022