NCB Holdings Bhd 
(Aug 27, RM4.31)
Maintain underperform with an unchanged target price (TP) of RM4.05: We attended NCB Holdings Bhd’s second quarter ended June 30, 2015 (2QFY15) analyst briefing, which was attended by about 15 analysts and fund managers. 

Post-briefing, we think that the second half (2HFY15) might be more challenging for the group, in view of the anticipated slower growth in throughput volume, which will affect its port operation business. Meanwhile, the loss-making logistics arm is also bracing for more headwinds due to a slowdown in economy activities. 

Potential synergy from the collaboration with MMC Corp Bhd is still limited at this juncture. All in, we maintain “underperform” on NCB with an unchanged TP of RM4.05, based on 1.3 times FY16E (estimate) price-to-book value (P/BV). 

Revenue from port operations in 1HFY15 grew marginally by 3.7%, which was more modest compared with the 8.7% growth in throughput volume (1HFY15: 1.35 million twenty-foot equivalent units). We understand that the mismatch was due to changes in volume mix, whereby the gateway/trans-shipment mix had changed to 55%/45% from 60%/40% registered a year ago. 

Note that the gateway (import/export) commanded a higher tariff rate (about 64%) as compared with trans-shipment. However, lower fuel and maintenance costs lifted profit before tax by 62.4% to RM50.6 million. 

Moving forward, the group expects 2HFY15 to be more challenging, in view of the uncertain and volatile global economy outlook. Despite initiatives including downsizing and cost rationalisation, its logistics division recorded a higher loss before tax of RM19.5 million in 1HFY15 from RM16.5 million in 1HFY14. The management attributed the widened loss to a slowdown in oil and gas, and infrastructure construction activities. 

The trucking division has also been downsized, which stopped recurring operating costs, but fixed costs were still incurred from the depreciation of equipment and vehicles. Moving forward, the group aims to increase the utilisation rate of its haulage division to 90% from 75% currently, while also plans to reduce wastages and leakages by further rationalising the operations. All in, the group is still confident of a break-even for the division in FY16, which is in line with our expectations. 

We understand that a collaboration committee has been set up by NCB and MMC Corp, the major shareholder which increased its stake to 30.1% in mid-July. Currently, the interaction between the two parties is still limited to knowledge know-how sharing as well as personnel-exchange programmes.

The management revealed that the interface programme linking to the customs can be shared between the two parties, but we think that the cost savings are minimal. Meanwhile, the public shareholding spread of more than 25% has been accepted by Bursa Malaysia, but the group will try to push the spread closer to a benchmark as advised by the authority. 

Post-briefing, we made no changes to our earnings forecasts. Thus, we maintain our TP of RM4.05 based on an unchanged 1.3 times FY16E P/BV. NCB’s share price performance was strong, probably driven by MMC Corp increasing its holding stake. However, we think that the chance of a general offer is slim, in view of MMC Corp’s high gearing. Thus, the share price might normalise to match its fundamentals. — Kenanga Research, Aug 27

This article first appeared in digitaledge Daily, on August 28, 2015.