This article first appeared in The Edge Malaysia Weekly on October 2, 2017 - October 8, 2017
AFTER seeing net profit hit a four-year low in its financial year ended June 30, 2017 (FY2017), Harbour-Link Group Bhd (HLGB) is expecting earnings to rebound in FY2018, driven by improvements in its shipping and logistics divisions.
Managing director Francis Yong Piaw Soon says the shipping downturn has hit rock bottom. Barring unforeseen factors such as an escalation of tensions with North Korea, he feels the market has stabilised as far as the Bintulu-based company is concerned.
“For the last few years, we have seen [the shipping market] hit rock bottom,” says Yong in a telephone interview. “There are only three shipping operators now [in the container cargo segment], so it is just nice for the market.”
HLGB operates mainly on the domestic shipping routes, connecting ports in Peninsular Malaysia and Sabah and Sarawak. In 2015, local competitor Hubline Bhd withdrew from the container shipping business due to heavy losses while PDZ Holdings Bhd quit last year, selling its vessel PDZ Megah to HLGB.
That has left HLGB, MTT Shipping (East Malaysia) Sdn Bhd and Miri-based Shin Yang Shipping Corp Bhd in control of the Sarawak shipping volume.
On Sept 8, MMC Corp Bhd announced that its indirect subsidiary, Northport (M) Bhd, had inked a memorandum of understanding with Shin Yang Shipping and HLGB to form a strategic alliance called The East Malaysia Network.
The alliance took effect on Sept 1 and will lead to savings for HLGB, although Yong declines to provide the specifics due to competitive considerations. Nevertheless, HLGB will now be able to redeploy some ships, which is expected to improve the shipping division’s earnings.
“We will exchange slots on each other’s (Shin Yang Shipping’s) ships, which will increase our load capacity,” says Yong. “We will see sizeable savings in terms of operating costs; we will see the result from the second quarter (ending Dec 31).”
As for the scrapping of the cabotage policy in May, there has been no immediate impact, he says. But whether this will be the case in the longer term remains to be seen, he cautions.
The policy, introduced in the 1980s, had limited the shipping of goods between Peninsular Malaysia and Sabah and Sarawak to Malaysian-flagged vessels.
However, there has been partial liberalisation, allowing some foreign shipping lines such as MTT Shipping to call at Bintulu Port directly.
In FY2017, HLGB’s revenue fell 11.73% year on year to RM521.5 million while net profit came in at RM26.8 million, down 52.31% year on year and the lowest in four consecutive financial years.
It is worth noting that the shipping division contributed 60.1% to the group’s revenue, the highest in six years. That helped the division bounce back to profitability after a making a loss in FY2016. Pre-tax profit contribution stood at 29.7%, a four-year high.
However, the improvement in the shipping division was offset by the slower performance of the logistics services and machinery division, which was dragged down by lower cargo volume and higher operating costs. The division accounted for 63% of the group’s pre-tax income in FY2017.
Meanwhile, HLGB’s engineering division slipped into the red due to the completion of projects while newer projects were still at the initial stages.
In an Aug 29 report, Maybank IB Research notes that mega infrastructure projects in Sarawak, such as the upcoming Baleh Dam, will drive growth for HLGB on top of the low base in FY2017. The research house expects the company’s core net profit to rise from RM22 million to RM31 million by FY2018. It upgraded the stock to a “hold” with a target price of 71 sen because it feels the counter has seen enough correction.
The stock closed at 69.5 sen last Thursday — down 15.2% year to date — giving the company a market capitalisation of RM278.28 million. Maybank Research pegs the fair value of the company at RM304.2 million.
Yong is more conservative. While he expects earnings to improve in FY2018, he does not see HLGB’s financial performance matching that of FY2016, which was boosted by one-off gains at its property arm.
In FY2016, net profit came in at RM56.2 million on revenue of RM590.8 million, both at the highest level since the company assumed the listing status of Tongkah Holdings Bhd in 2004.
Looking ahead, Yong expects the logistics division to at least maintain its performance. The division will be completing additional warehousing capacity by January, which will add 1,600 sq m to the existing 9,000 sq m, of which 5,000 sq m is leased.
“We hope to construct another 10,000 sq m in Bintulu,” says Yong. “We may start construction by the end of the current year and it will take about 12 months to complete.”
He adds that the cost will likely be around RM12 million, which is expected to be generated from 70% financing and 30% internal cash utilisation.
As at June 30, 2017, HLGB had a cash pile of RM75.52 million, a current ratio of 2.07 times and gearing ratio of 0.21 times.
But given that lower volume dragged down FY2017 revenue in the logistics services and machinery division, is it wise to essentially double the group’s warehousing capacity?
“There is ample cargo to store,” says Yong, adding that the operation cost is not expected to rise significantly in FY2018.
For FY2017, HLGB declared a dividend of 1.5 sen per share subject to shareholders’ approval in its upcoming annual general meeting. Its payout ratio is 22.4%, the highest in four years.
Maybank Research forecasts HLGB’s net dividend to hit 2.1 sen in FY2018 and rise over the next two financial years.
Yong declines to provide the dividend outlook for FY2018 but reiterates the group’s policy of paying out about 30% of profits. He expects to maintain that ratio barring unforeseen circumstances.
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