THE global shipping industry is grappling with overcapacity and depressed freight rates, and Malaysian players are not immune to such headwinds. Bintulu-based Harbour-Link Group Bhd (HLGB) saw its shipping arm fall into the red in the financial year ended June 30, 2016 (FY2016).

Amid the slump, however, the company is looking to acquire distressed vessels at a good price. It is in the midst of buying PDZ Megah, a steel full container carrier, for RM6.36 million from PDZ Holdings Bhd. The deal was signed on Oct 28.

The news raised some eyebrows given the overcapacity in the container shipping industry. It also did not excite the market, with HLGB’s share price falling over 8% between Oct 28 and Nov 17. It closed at 84.5 sen apiece last Thursday, giving it a market capitalisation of RM338 million.

Year to date, the counter has fallen more than 36%.

Managing director Francis Yong Piaw Soon says the purchase was a strategic decision to capture market share since HLGB was already buying slots on PDZ Megah. Otherwise, the company would have needed to charter another vessel, he adds.

“Since PDZ Holdings is selling [the vessel] at a reasonable price, it is strategically ideal for us to buy,” Yong tells The Edge via email. He says owning PDZ Megah is ultimately cheaper than chartering it, and provides operational flexibility.

HLGB mainly plies the domestic shipping routes, connecting ports in Peninsular Malaysia, Sabah and Sarawak. While the company has not identified other acquisition targets, it is keeping an eye out for distressed vessels of good value to add to its fleet, says Yong. Purchasing decisions will also depend on its future needs, he adds.

Analysts say the shipping volume in Sarawak is largely controlled by PDZ Holdings, HLGB, Shin Yang Shipping Corp Bhd and MTT Shipping (East Malaysia) Sdn Bhd, which is a unit of Taiwan-based Evergreen Marine Corp.

While PDZ Holdings announced the sale to Bursa Malaysia, HLGB did not do so, likely due to the deal’s relatively small size.

HLGB says it intends to partly finance the acquisition via bank borrowings of RM4.2 million. The rest will be paid from its cash balance.

As at June 30, the company had RM97.5 million in cash. Total borrowings stood at RM101.4 million while it had total equity of RM363.7 million. That yields a gearing ratio of 27.8 times — although minus available cash, net gearing comes in at a negligible 0.01 times.

In a filing with Bursa, PDZ Holdings says the vessel is registered with Port Klang, has a gross tonnage of 6,775 tons and a registered tonnage of 3,733 tons. It adds that the market value of the vessel is RM6 million, based on an independent valuation report dated Sept 20.

PDZ Holdings is selling PDZ Megah at a net loss of RM700,000 as part of its strategy to cope with depressed freight rates due to overcapacity in the domestic shipping market. After the sale is completed, the company will be left with two container vessels — PDZ Maju and PDZ Mewah — according to its website.

In contrast, HLGB is adding a fourth ship to its fleet of container vessels. PDZ Megah will also be the largest among the four, with a length of 113.94m, breadth of 18.5m and depth of 11m.

The acquisition will lead to a slight consolidation of existing tonnage for HLGB, says one analyst, who declined to be named. “The market is slow but the acquisition should still be good,” the analyst says, adding that with more tonnage under its control, the company will have “more bargaining power” with regards to freight rates.

However, the effects may not be immediately felt by HLGB, cautions another analyst, who says that ultimately, the existing overcapacity remains an issue.

“Consolidation by itself does not improve freight rates in the market,” says the second analyst. “Some of the capacity needs to be removed — either stop deploying some vessels, lay them up or scrap them altogether.”

Looking ahead, HLGB expects its shipping arm to return to profitability in FY2017 despite the red ink in FY2016, which dragged down the group’s performance in what was otherwise a record year.

For FY2016, it reported RM590.7 million in group revenue, up 16.5% year on year, while net profit came in 8.5% higher at RM56.2 million. Both the top-line and bottom-line figures were the highest it has achieved since it was listed on the Main Board of Bursa on Jan 6, 2004, according to Bloomberg data.

However, its shipping segment saw a pre-tax loss of RM3.3 million in FY2016 — its first annual loss in at least five years — despite a record turnover of RM268.3 million, according to its annual report. The shipping arm traditionally contributes between 60% and 80% to full-year revenue but this contribution had fallen to 43.8% in FY2016.

HLGB attributed the loss to the purchase of two other vessels, which were delivered in September and November last year. “One of the vessels went for docking, which incurred repair expenses,” says the company.

The dip seen in shipping was counterbalanced by its logistics and property divisions, which collectively accounted for 46% of group turnover in FY2016. The logistics arm held steady with RM40.5 million in pre-tax income, 15% lower year on year.

Its property segment saw pre-tax contribution surge to RM49.1 million, up from about RM5 million the year before. But this was a one-off and is unlikely to be repeated in FY2017, says Yong. He adds that the pre-tax income for that division is expected to return to the single-digit millions seen in FY2014 and FY2015.

According to him, “all segments are challenging” at the moment, so the company is trying to hang on and “maintain all the trades as normal”. HLGB is controlling its capital expenditures and managing its cash flow to weather the turbulence, he says.

“The shipping market is always fluctuating. Freight rates are depressed due to the poor economic situation since early 2015,” says Yong. He hopes that the industry will “recover once local economic conditions improve”.

Yong and executive director Wong Siong Seh together hold a 53.15% stake in HLGB through two holding companies. Individually, Yong has a direct stake of 6.18% and Wong, 3.85%, which means that the two founding members of the company control a combined 63.18% block between them.

Both men are credited with leading the group’s growth since it was established in 1991 — then known as Harbour-Link (M) Sdn Bhd — which saw various business activities consolidated under a holding company.

“It’s a stable, well-run company despite the unfavourable macro conditions right now,” opines an analyst, who adds that the company has “staying power” despite its unexciting outlook in the near term.

The subdued short-term prospects may explain HLGB’s valuation — it has a forward price-earnings ratio of just 6.5 times.

In an August report, Maybank Research put a sum-of-parts valuation of RM609.5 million on the group, although this is before a 30% discount due to weaker short-term earnings prospects.

Yong believes the company is valued on the lower side but concedes that share prices are dictated by the market.

As for dividends, the company has consistently paid out between 14% and 19% of its profits over the past seven financial years. The lone exception was in FY2013 when the payout ratio was 89% as its net profit had fallen to a six-year low then.

Its dividend yield has mostly stayed around 2% over the timeframe. The street forecast for FY2017 is a payout ratio of 20%, according to Bloomberg data.

Yong says dividends for FY2017 may be kept at FY2016 levels, although this will depend on the company’s financial performance.

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