Kenanga Research & Investment

Bintulu Port Holdings - Tariff Hikes on the Horizon

Publish date: Fri, 05 Apr 2024, 10:08 AM

Upon commissioning in 2028, two large-scale hydrogen plants in Bintulu will generate green energy cargoes for BIPORT. Sarawak state’s takeover of the Bintulu Port Authority (BPA) could hasten Bintulu Port’s tariff hikes. We raise our FY25F net profit forecast by 14%, lift our TP by 6% to RM5.90 (from RM5.55) but maintain our MARKET PERFORM call.

We came away from a recent engagement with BIPORT feeling upbeat on its prospects. The key takeaways are as follows:

1. 10% revenue from handling of green energy by 2028. BIPORT has set itself a target of 10% of total revenue coming from the handling of green energy by 2028, with the balance from LNG (40%) and non- LNG (50%). At present, its revenue mix is 50:50 LNG and non-LNG.

Sarawak state’s investment in two large-scale hydrogen plants in Bintulu, namely, H2biscus and H2ornbill, pursuant to its hydrogen economy agenda, will produce green energy cargoes to BIPORT such as green hydrocarbon, ammonia & methanol as well as blue ammonia (see the next page for further details). In addition, BIPORT will also handle biomass fuels produced in the hinterland.

In the meantime, it will benefit from the handling of construction materials for the hydrogen plants.

2. Stronger prospects for port tariff hikes. BIPORT appeared more upbeat on the prospects of Bintulu Port’s tariff hikes. This follows Sarawak state’s plan to take over the BPA. We understand that the takeover could be completed as soon as June 2024, paving the way for a 10% hike in Bintulu Port’s tariffs by FY25, based on our prediction. We also understand that Sarawak state has its own development master plan for all ports in Sarawak, with the key focus being on enhancing shipping connectivity with other major global transportation and logistics hubs.

Recall, there has not been any revision to Bintulu Port’s tariffs since 1993. Currently, Bintulu Port’s container tariff is 38% lower than that of Samalaju Industrial Port. It currently charges RM207.50 per twenty- foot equivalent unit (TEU) for local containers, vs. RM335/TEU charged by Samalaju Industrial Port. We expect a potential step-up in earnings if Bintulu Port is granted a significant hike in its port tariffs. Currently, Bintulu Port operates under an interim lease agreement until Dec 2024.

Separately, the recent talks on the potential resumption of Malaysia-South Korea free trade agreement covering digital economy, green economy and supply chain could potentially also benefit BIPORT as South Korea is one of the largest importers of Malaysian LNG via BIPORT.

Forecasts. We raise our FY25F net profit by 14% based on our assumption of a 10% hike in Bintulu Port’s tariffs. We predict tariff hikes of up to 40% in total to be staggered over a 30-year concession period.

Valuations. Correspondingly, we raise our DCF-derived TP by 6.3% to RM5.90 from RM5.55 (WACC: 5.5%; TG: 2%). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Outlook. The LNG cargo throughput at Bintulu Port will remain stable as sustained demand from Japan and South Korea will more than cushion the slowdown in demand from China. Meanwhile, there has been a pickup in inbound and outbound cargo volumes at Samalaju Industrial Port from its key customers, i.e. PMETAL and OMH, despite the weak China’s economy. We believe its key customers have an edge over their peers in the international market as their products have low-carbon footprint given the hydro power input. Also, as it stands today, Western countries still have outstanding sanctions on Russian aluminium (that makes up c.6% of world aluminium production) and hence will have to look for alternative sources of aluminium supply.

Investment case. We continue to like BIPORT for: (i) its steady income stream from handling LNG cargoes for Malaysia LNG Sdn Bhd (that typically makes up close to 50% of its total profit), (ii) a potential step-up in earnings if Bintulu Port is granted a significant hike in its port tariffs, and (iii) the tremendous growth potential of Samalaju Industrial Port backed by rising investment in heavy industries in Samalaju Industrial Park. Maintain MARKET PERFORM.

Risks to our call include: (i) inability of Bintulu Port to secure an adequate port tariff hike to offset escalating operating cost, and (ii) a global recession hurting heavy industries in Samalaju Industrial Park.

Source: Kenanga Research - 5 Apr 2024

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