We  believe  NCB’s earnings may continue to face downward pressure, as  the  company  needs  time  to  restructure  its  logistics  business.  It  is also  facing  competition  from  more  productive  neighbouring  port operators.  Thus,  we  further  revise  downwards  NCB’s  FY13F-14F earnings on higher fuel costs. Maintain NEUTRAL, with our FV trimmed to MYR4.38 (from MYR4.57).  
 
- 2QFY14  earnings  a  negative  surprise.  NCB  posted  a  2QFY14  net profit  of  MYR2.8m  (down  >100%  y-o-y),  which  was  below  our  and consensus  estimates.  The  MYR45.0m  losses  reported  by  its  logistics arm, due mostly to cost overruns during the quarter under review, caught us  by  surprise  although  management  had  earlier  guided  for  such overruns. NCB’s throughput  volume  also declined  by  6.3% y-o-y,  which impacted its port operations.  

- Outlook  remains  challenging.  We  believe  that  NCB  may  face  further earnings  pressure  moving  forward,  as  its  logistics  business  is  facing intensifying  competition.  The  group  may  need  time  to  restructure  this division  and  bring  it  back  to  profitability.  Moreover,  we  think  that  NCB’s port operations may continue to face challenges from  neighbouring port operators that are deemed more productive.  

- Revising  earnings  forecasts.  We  are  taking  a  more  conservative stance  on  NCB’s  earnings  forecasts,  mainly  due  to  potential  cost increments following the Government’s recent fuel price hike. Hence, we lower  our  FY13/FY14  net  profit  forecasts  to  MYR48m/MYR76m  (from MYR55m/MYR84m).

- Risks.  Intensifying  competition  and  weak  cost  controls  will  further dampen NCB’s profitability.

- Maintain  NEUTRAL.  We  maintain  our  NEUTRAL  recommendation  on NCB,  with  our  FV  revised  down  to  MYR4.38  (from  MYR4.57)  based  on discounted  free  cash  flow  to  equity  at  an  unchanged  required  rate  of return  of  11.5%.  This  values  the  stock  at  an  unattractive  implied  FY14 P/E of 24.9x.

Source: RHB