Please read carefully the important disclosures at the end of this publication.

This report has been prepared by CIMB for the CMDF-Bursa Research scheme. INITIATING COVERAGE

CIMB Research Report

30 Apr 2012

RECOM Hold Bintulu Port Holdings Bhd PRICE RM7.02

Buoyed by a high Score MKT CAPITALISATION RM2808m

BOARD Main

SECTOR Transport Infrastructure

INDEX COMPONENT Nil

BPH MK / BPOT.KL Raymond Yap + 60 (3) 2084-9769 – raymond.yap@cimb.com

Investment highlights

• Starting coverage with Hold call and RM7.30 target price. Bintulu Port Holdings’

(Biport) Bintulu Port has an entrenched position as it is the largest container port in East Malaysia and Malaysia’s sole LNG export gateway. It is also an important port for palm oil exports. Despite its solid business position and an attractive net dividend yield of around 5.3%, we see limited share price upside due to its modest near-term earnings growth and relatively pricey valuations. The stock is also very illiquid. We begin coverage with a Hold call and DCF-based target price of RM7.30 based on a WACC of 8%.

• A key LNG export gateway. Bintulu Port is the world’s second largest LNG export

terminal, after Qatargas’s terminal. A substantial proportion of its revenue is derived from LNG vessel calls, providing the company with stable and lucrative earnings over the years. Capacity is a constraint on earnings growth from this division but this business is still expected to generate a sizeable portion of Biport’s earnings.

• Score a game changer. The huge investments pouring into Sarawak and the entry

of several energy-intensive industries will benefit Biport in the medium- to long-term. The import of raw materials and export of finished goods will require port services. Biport has already been asked to develop and manage the new Samalaju Port, located nearby the Samalaju Industrial Park where several huge projects are currently under construction.

• Minimal earnings growth for now. As Score projects are still in progress, we see

limited growth for Biport’s earnings in the next 1-2 years. Projects at Score will take several years to complete and reach full production capacity. The construction of the Samalaju Port will also take several years to complete, limiting Biport’s ability to handle large amounts of cargoes.

Key stock statistics Per share data

FYE Dec 2011 2012F

EPS (sen) 42.7 39.5

P/E (x) 16.4 17.8

Net Dividend/Share (sen) 37.5 37.5

Book Value/Share (RM) 1.65 1.67

Issued Capita l (m shares) 400.0 400.0

52-weeks Share Price Range (RM) RM6.33/RM7.30

Major Shareholders: %

Petroliam National 32.8

Sta te Financial Secretary 30.7

KWAP 9.5

FYE Dec 2009 2010 2011 2012F

Book Value (RM) 1.63 1.60 1.65 1.67

Cash Flow (sen) 39.6 39.1 47.5 43.4

Earnings (sen) 32.2 34.9 42.7 39.5

Net Dividend (sen) 37.5 37.5 37.5 37.5

Payout Ratio (%) 116.5 107.6 87.9 94.9

P/E (x) 21.8 20.1 16.4 17.8

P/Cash Flow (x) 17.7 18.0 14.8 16.2

P/Book Value (x) 4 .3 4.4 4.3 4.2

Dividend Yield (%) 5.3 5.3 5.3 5.3

ROE (%) 16.8% 21.6% 26.3% 23.8%

Net Gearing (%) nil nil n il nil

Source: Company, CIMB estimates, Bloomberg

For further information, kindly contact Calvin Yew at (603) 2084 9964 or calvin.yew@cimb.com

[ 2 ]

Background

Corporate profile A key LNG export gateway. Bintulu Port commenced operations in 1983 as the sole

export gateway for liquefied natural gas (LNG). The port was originally operated by Bintulu Port Authority (BPA), which is a federal statutory body under the purview of the transport ministry.

Privatised in 1993. The port operations were privatised and transferred to Bintulu Port Sdn Bhd (BPSB) in 1993 for a 30-year period until 31 December 2022, in exchange for lease rentals. BPSB has an option to extend the term of the lease for another 30 years to 2052.

Scope of responsibilities. Bintulu Port Sdn Bhd (BPSB) is in charge of port management and operations, including development of new facilities. BPA remains the port’s regulatory body, controlling the tariff policy and overseeing safety in port operations. BPSB was subsequently parked under Bintulu Port Holdings Bhd (Biport) which was listed on the main board of Bursa Malaysia on 16 April, 2001.

Corporate structure Petronas a major shareholder. Biport’s biggest shareholder is Petronas which holds

a 32.8% stake. The next largest shareholder is the State Financial Secretary of Sarawak with a 30.7% stake. Kumpulan Wang Amanah Pencen owns 9.5% while the remaining 27% is owned by the public.

Bintulu Port Sdn Bhd (BPSB) provides port services for the handling of LNG and various other cargoes. Port services remain the major earnings contributor, accounting for 94% of FY11 revenue and 92% of pretax profit.

Another 100%-owned subsidiary, Biport Bulkers Sdn Bhd (BBSB) started operations on 15 December 2004. BBSB specialises in providing bulking installation facilities for palm oil, edible oils, vegetable oils, fats and its by-products. Contribution from BBSB remains small.

Figure 1: Biport’s shareholding structure

Source: Company, Bloomberg

[ 3 ]

Business A key port in Sarawak, East Malaysia. Bintulu Port is located in northeast Sarawak

along the route between the Far East and Europe (Figure 2). It is strategically positioned to serve the resource-rich Sarawak hinterland, Malaysia’s major LNG hub and the surrounding Brunei Indonesia Malaysia Philippines East Asean Growth Area (BIMP-EAGA).

Comparing Bintulu to other Malaysian ports. There are over 30 ports in Malaysia, with the most important ports located along the Straits of Malacca where the majority of the population reside and most of the country’s economic activities take place.

From the perspective of container shipments alone, Bintulu Port is small relative to Port Klang, Port of Tanjung Pelepas (PTP), Penang Port and Johor Port, which have emerged as Malaysia’s bigger and more competitive ports in terms of cargo handled, infrastructure, the number of destinations linked to port as well as the ability to attract shipping lines.

However, this understates the importance of Bintulu Port, which has a monopoly on LNG exports. It is also the leading container port in the Sabah and Sarawak region.

Figure 2: Ports in Malaysia

Source: Portsworld

Figure 3: Relative size of ports in Malaysia

Source: Portsworld

[ 4 ]

Port features

Bintulu Port covers an area of 320 hectares and consists of an outer LNG harbour and a first and second inner cargo harbour, each protected by breakwaters.

Figure 4: Aerial view of Bintulu Port

Source: Company

Figure 5: Port layout

Source: Company

Malaysia’s sole LNG export terminal. Petronas’s LNG complex is located next to Bintulu Port. The LNG complex houses three LNG terminals with a total of eight trains, namely MLNG Satu, MLNG Dua and MLNG Tiga with a combined production capacity of approximately 24m tonnes p.a. It is the world’s second largest LNG export terminal, the largest being Qatargas’s LNG terminal.

Gas is extracted from the nearby Luconia fields offshore Sarawak, liquefied in the MLNG complex and shipped to customers in east Asia. The LNG supply contracts that Petronas signs with its customers are usually long term, averaging 15-20 years. Backed by these long-term LNG supply contracts, LNG exports have always been Bintulu Port’s main cargo and major revenue driver, contributing approximately 75-80% of total revenue over the past five years.

An all-weather multi-purpose deepwater seaport. In addition to being the primary hub for LNG, the port is equipped to handle other types of cargo including container boxes, crude oil, edible oil, petroleum products, logs and timber products, liquefied petroleum gas and urea. Bintulu Port has different types of berths and terminals to cater to the various cargoes.

[ 5 ]

Figure 6: Berth facilities

Type of Berth

No of

Berth/Jetty Length(M) Depth(M)

Max Vessel

S ize(DWT)

Capacity

(m tonnes)

General Cargo Wharf 3 514.5 10.5 25,000 2.5

Bulk Cargo Wharf 1 270 13.5 60,000 0.9

LNG Jetty 3 450 15 80,000 28.3

Petrochemica l Terminal 2 200 11 30,000 1.8

LPG Jetty 1 492.8 11 51,000 0.7

Conta iner Terminal 2 450 14 55,000 400,000 TEUs

Edible O ils Terminal 2 220 14 1,000 3.0

Multipurpose Terminal 5 950 14 40,000 4.1

Coastal Terminal 1 120 4.5 320,000 0.2

Source: Company

Earnings model

Revenue from storage, cargo and vessel handling services. Biport earns its revenue through its vessel call and cargo handling services. Charges for vessel handling services include port dues, berth occupancy, pilotage and towage fees. As for its cargo handling services, charges are levied for the transfer of cargoes onto or off a vessel.

LNG the biggest contributor. Between 2006 and 2011, LNG was the single largest contributor of revenue, at 75-80%. In 2011, the container and break bulk segments each accounted for 5-7% of revenue while the remaining cargo types had very minimal contribution. In 2011, the main destinations for the exports were Japan (62%), S. Korea (17%), Taiwan (10%) and China (9%). In terms of operating profit, we believe that most of the other divisions apart from LNG and Biport Bulkers are loss-making. The LNG division contributes nearly all of Biport’s operating earnings.

Figure 7: Top 10 cargo revenue earners (RM m)

Cargo Types 2006 2007 2008 2009 2010 2011

LNG 303.4 323.1 331.4 329.6 333.0 354.1

Conta iner 20.2 23.3 29.8 26.6 29.3 26.4

Break bulk 30.5 29.4 28.6 25.4 25.5 21.6

Palm oil 4 .6 4.7 7.5 4.8 7.7 9.1

Petroleum products 5 .1 6.0 7.6 5.9 6.5 7.0

Crude oil 5 .8 6.0 6.5 6.0 5.8 6.0

LPG 4.5 5.7 6.4 4.4 4.6 na

Urea 2.7 2.2 2.6 2.4 1.8 na

Bulk Fertilizer 0 .6 1.4 1.9 1.0 2.9 4.7

Silica Sand 1.2 0.9 1.4 1.0 1.0 na

Palm Kerne l 0 .7 1.2 1.4 1.3 3.5 4.7

Total non-LNG 82.1 88.4 103.2 92.3 101.0 100.7

LNG % of total rev 78.7% 78.5% 76.3% 78.1% 76.7% 77.9%

Source: Company

Leasing charges form the bulk of costs. All of the fixed assets and terminals that were transferred to Biport upon privatisation in 1993 are subject to lease charges. As such, the annual lease payment to the Bintulu Port Authority (BPA) is Biport’s biggest cost component. In FY11, the port’s lease expense was the largest chunk of operational expenses at about 43%.

Assets built and owned by BPSB are not subject to lease charges. Some of the facilities within the port, such as the container terminal and Bintulu Port’s storage tanks and jetty, were built using Biport’s internal funds and are, therefore, not subject to lease charges.

Other operational expenses. Staff and maintenance costs are another large chunk of costs, accounting for 25% and 24%, respectively in FY11. As Biport provides port services to its customers, it is no surprise that the company requires manpower in order to maintain the quality of service. On the maintenance aspect, Biport has to incur dredging fees every year to maintain the depth of the water levels around the port so that larger vessels will be able to dock. The regular repair and maintenance of facilities constitutes part of the maintenance costs.

[ 6 ]

Figure 8: Breakdown of direct costs for FY11

Staff

25%

Lease

43%

Maintenance

24%

Admin

8%

Source: Bintulu Port, CIMB

Key management

Tan Sri Dato’ Sri Dr. Wan Abdul Aziz Wan Abdullah was appointed chairman of Biport on 1 November, 2009. He is the Secretary General of Treasury, Ministry of Finance, a post he has held since 2007. He has close to 40 years of experience in the public sector, most notably in the area of economic planning. He holds a Bachelor of Economics (Honours) in Applied Economics from University of Malaya and a Master of Philosophy in development studies from University of Sussex, U.K. He also has a PhD (Business Economics) University of Leeds, U.K and attended the Advanced Management Program at Harvard Business School in 2004.

Dato Mior Ahmad Baiti bin Mior Lub Ahmad was appointed CEO in July 2011. Prior to that, he served as the CEO of Bintulu Port Sdn. Bhd. as well as the acting CEO of Biport and Biport Bulkers Sdn. Bhd. effective 1st July 2004. He graduated with a Bachelor of Science in offshore engineering (civil) from Heriot-Watt University, Edinburgh, Scotland in 1981 and began his career as a civil engineer at Bintulu Port Authority (BPA) in 1981.

Earnings outlook

LNG Stable earnings growth. We expect the LNG division to remain Biport’s largest

revenue contributor over the next few years, albeit at a reducing proportion of total revenue. Revenue from LNG handling services is likely to remain fairly stable as Petronas’s three MLNG plants, which have a combined capacity of 24m tonnes per annum (tpa), are already operating close to full capacity.

In FY11, total LNG throughput amounted to 24.3mtpa, implying a 101.3% utilisation rate. This was the highest ever attained due to improvements in plant reliability and debottlenecking efforts in the MLNG Dua plant. LNG vessel calls at Bintulu Port increased to 465 as well.

Marginal increase in vessel calls. In our forecast, we assume a 4-5 increase in the

number of vessel calls p.a. over the next four years until 2015. This implies an annual growth of 1%. Based on our estimate of a fee of around RM745,000 for each vessel call, we expect the revenue contribution from LNG to see a RM3m-4m step-up annually. In 2016, we expect a step-up in LNG calls stemming from the additional capacity of the ninth LNG train which could add RM25m in revenues from the base in 2015.

Ninth LNG train. It was recently announced that Petronas is embarking on a new production train at its Petronas LNG Complex in Bintulu. It has awarded the contract for the front end engineering design (FEED) for the project to JGC Corporation and a partnership of Chiyoda Corporation and Saipem S.p.A. The two contractors will compete in the FEED and price proposal for the project, which is scheduled to be completed in December 2012.

[ 7 ]

LNGWorldNews reported that the ninth LNG train will add 3.6mtpa to the 24mtpa existing production from the eight trains. This implies a 15% rise in capacity, which will only be completed by the fourth quarter of 2015. The required feed gas volume will be supplied by the various fields offshore Sarawak.

Upon completion, Petronas LNG Train 9 will include gas receiving facilities, acid gas removal unit, dehydration and mercury removal unit, fractionation and liquefaction unit, LNG rundown unit and all the associated utilities and facilities. The LNG produced from the new train will be exported via the existing storage and loading facilities within the complex.

Sufficient gas supply for at least 35 years. Based on Petronas’s estimates as at January 2010, Malaysia has natural gas reserves of 80tr standard cubic feet which could last for another 36 years. This does not impute discovery of new fields or new technology that could improve production. According to the Malaysian Gas Association, natural gas resources in Malaysia are distributed almost equally between Peninsular Malaysia, Sabah and Sarawak. Due to the low population density in East Malaysia, the natural gas resources are harnessed to produce LNG for exports.

Figure 9: LNG vessel calls at Bintulu Port

428

421

442

452

443

448

465

390

400

410

420

430

440

450

460

470

2005 2006 2007 2008 2009 2010 2011

Source: Company, CIMB

Figure 10: Current Petronas’s LNG liquefaction facilities at Bintulu

Petronas's LNG liquefaction facilities at Bintulu

Capacity (Mtpa) Trains (no) Start up

MLNG Satu 8.2 3 1983

MLNG Dua 9.0 3 1996

MLNG Tiga 6.8 2 2003

Total 24 8

Source: Company

[ 8 ]

Figure 11: Gas supply to Sabah and Sarawak

Source: Petronas, CIMB

Container Growing container terminal. Although LNG has traditionally been the port’s main

cargo, containerised cargoes are growing significantly as they are coming off a low base. The six-year CAGR of 6.5% was driven principally by growing transhipment cargo from ports in Sabah and Sarawak, as well as neighbouring countries like Indonesia and the Philippines.

Connectivity. Biport has successfully established shipping connectivity to multiple destinations. Approximately 15 shipping lines currently serve Bintulu Port, with four lines offering direct services to the Far East ports. Main line operators such as Evergreen Marine and HUBline both call at Bintulu Port weekly. The major port calls that they make include Port Klang (8x weekly), Pasir Gudang (8x weekly), Singapore (5x weekly), Kota Kinabalu (4x weekly) and Hong Kong (4x weekly). Evergreen is one of Bintulu Port’s main customers.

Not too profitable. Unfortunately, the container division is not very profitable and in the early years, was even turning in losses. This is due to intense competition and low rates for container handling. In addition, Biport’s container operations do not have the scale needed to be highly profitable, compared to other ports in Singapore, Klang and Johor located along the Straits of Malacca.

In FY11, Bintulu Port registered a 14% drop in cargo throughput to 215,500 TEUs. This is due to the rerouting of some feeder services which affected transhipment volumes. However, this is just a blip and we expect cargo throughput to increase by approximately 10-15% over the next few years, spurred by projects at Score.

Expanding capacity. Realising the importance of economies of scale, Biport is expanding its container division to capture a bigger slice of the cargo traffic in the region, especially when projects at Score, Sarawak’s development corridor are completed. It currently has one container terminal with two berths that are capable of handling up to 400,000 TEUs p.a. In terms of handling equipment facilities, Bintulu Port has recently procured two quay cranes and eight RTG (rubber tyred gantry) cranes, bringing the total to four quay cranes and 14 RTGs. The expansion plans entail the development of an additional 200m of the berth which will complete by end 2015.

[ 9 ]

Figure 12: Containerised cargo throughput (‘000 TEUs)

147.8

199.7

251.8

290.2

248.4 251.3

215.5

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

2005 2006 2007 2008 2009 2010 2011

Source: Company

Figure 13: Bintulu Port – Shipping connectivity

Source: Company

[ 10 ]

Figure 14: Container port expansion

Source: Company

Sarawak Corridor of Renewable Energy (Score)

What is Score? Score is a major initiative undertaken to develop the central region and transform Sarawak into a developed state by year 2020. Its goals are to accelerate the state’s economic growth and development, as well as improve Sarawakians’ quality of life.

The core of the corridor is energy resources, particularly hydropower (28,000 MW), coal (1.45bn tonnes) and natural gas commonly found in Sarawak. This will allow Sarawak to price its energy competitively and encourage investments in power generation and energy-intensive industries that will act as triggers for the development of a vibrant industrial development in the corridor.

Investments pouring into Score. Between 2009 and 2011, Score attracted 14 mega projects involving RM28.55bn in total investments. The approved projects are mainly in energy-intensive industries such as smelter plants, polycrystalline silicon, metallic silicon and ferro alloy. 11 of these projects are located at the Samalaju Industrial Park. Projects by Press Metal Bintulu, Tokuyama Corporation Japan, Asia Mineral (Hong Kong) and OM Holdings (Singapore) are already in progress.

Development of Samalaju Port. Biport has been tasked with the responsibility of developing and operating the new Samalaju Port, located about 60km from Bintulu town. The port which is located on 442ha of land will facilitate the import and export of raw materials as well as finished goods for the numerous projects at the Samalaju Industrial Park. The port is part of Score’s 2008-2015 development timeline for the implementation of high-priority infrastructure projects.

Biport is in advanced discussions with the Sarawak state government and relevant authorities on the terms of agreement. The development of the port could be implemented in several stages, the first phase of which will be completed by end 2015 or early 2016.

[ 11 ]

Samalaju Port estimated to cost RM1.8bn-2.0bn. The construction of the entire port is speculated to cost around RM1.8bn. It was reported in the press that Biport will also receive a RM500m grant from the government. The grant will be used for dredging works and the preliminary phase of development.

From our checks, the construction of the port is likely to be funded through a combination of loans, equity and internal funds, although this has not been finalised yet. There is a possibility that Samalaju will be placed as a separate entity, similar to BPSB and BBSB. However, Biport may not own 100% of Samalaju Port but is likely to hold a majority stake. We have not factored the investment cost into our valuation model as the shareholding structure and terms of agreement have not been disclosed.

We do not discount the possibility of a tariff hike and/or reduced lease rental to make this new port a feasible project for Biport. However, Biport may need to reduce its LNG tariffs as requested by Petronas – an issue that has been dragging on for years.

Minimal impact near term, but to drive earnings in the long term. Growth in FY12’s throughput is likely to be only marginal while port space constraint is likely to hinder 2013-14 growth opportunities. While we do not doubt that massive investments have poured into Score, the majority of the factories and infrastructure are still under construction and most are expected to be completed between 2013 and 2014. We, therefore, do not expect to see material upside to Biport’s earnings in the near term.

Figure 15: Committed projects at Score and estimated annual trade import/export volumes

CompaniesImport Export Start Date MT ('000) TEUs

Press Metal Bhd alumina, anode carbon aluminium product 2Q12 1,000 - 2,000 13,000 - 17,000Asia Mineral manganese ore, coke, managanese alloy, 1Q13 2,000 -

quartz, lime, coal ore, coke retortHWG Mineral ferro silica, iron, coke ferro silicon 1Q13 <250 2,000 - 3,000

JFE Shoji Trade iron ore, coke, quartz ferro silicon 1Q13 <250 -

Sojitz mineral stone metal silicon 1Q13 <250 <1,000

Cosmos Petroleum quartz, coal, cokes metallurgical silicon 1Q13 <250 11,000 - 13,000

OM Holdings manganese ore, coke, managanese alloy, 2Q13 2,000 - 4,000 12,000 - 18,000silica quartz ferrosilicon

Tokuyama Corp silica stone, caustic soda, polycrystalline, silicon 2Q13 - 2,000 - 3,000petroleum, coke, electrode

Asia Cement quartz, woodchip, coal, metal silicon, silica fume 2013 500 4,000

Leader Universal alumina, anode carbon aluminium rod 4Q14 <250 5,000 - 6,000

Elkem A.S. quartz, woodchip, coal, metal silicon 2014 500 - 1,000 <1000charcoal, coke

Smelter Asia alumina, other raw aluminium products 2Q15 1,000 - 2,000 6,000 - 10,000

SALCO alumina, coke, pitch aluminium ingots 2015 3,000 - 5,000 5,000

Cummulative additonal 2012 <1,000 6,000 - 7,000trade volume starting 2013 5,000 - 6,000 30,000 - 40,000

2012 2014 8,000 - 9,000 40,000 - 50,0002015 >10,000 >50,000

Cargo Type Est. Trade Volume

Source: Sarawak Score

Break bulk, dry bulk and other divisions Leveraging Score. Bulk cargoes have the largest potential for growth, based on the

materials imported and exported for the various companies in Figure 14. At the moment, revenue from these cargoes is very small. For the new Samalaju Port, dedicated barge, aluminium and manganese berths will be constructed to facilitate the significant trade volumes.

[ 12 ]

Timber exports and fertiliser imports have growth potential. The timber-based industry is classified as one of the 10 priorities of Score. Timber products’ contribution to cargo throughput will be even more important as Bintulu Port promotes itself as a hub for all wood-based shipments from Sabah, Sarawak and Kalimantan in Indonesia.

Fertiliser cargo is also set to become a major cargo for Bintulu Port on the back of rising palm oil activities. In anticipation of growth in non-LNG cargo throughput, Biport has already developed a multipurpose terminal which entails a 500-metre wharf improvement, storage yard and warehouses, dedicated facilities for dry bulk as well as pulp and paper. The development was completed in 2011 at a cost of RM112.6m.

Palm oil

Sarawak’s only port-run palm oil bulking and storage facility. Bintulu Port Bulkers was set up to provide bulking and storage facilities for palm oil, edible oils, vegetable oils, fats and other by-products. It is the only port that provides such facilities in Sarawak.

Bintulu Port currently has 60 storage units with a combined capacity of 101,600 metric tonnes (mt). In 2007-2010, it constructed at a cost of RM57.8m 34 storage units, adding to the initial 26. Before 2008, Bintulu Port Bulkers was a loss-making entity but has since been profitable.

Strong long-term fundamentals for palm oil business. The current maturity profile

of palm oil trees in Sarawak suggests plenty of upside for palm oil exports. Planted oil palm area in Sarawak has notched a 10-year CAGR of 10.5% compared to only 3.6% for planted oil palm area for Malaysia as a whole. We expect Bintulu Port to be the port of choice in Sarawak for palm oil exports given that it is the only port with a dedicated berth for palm oil handling. Palm oil from plantation areas near Sibu and Miri are also channelled to Bintulu Port.

Figure 16: Planted area in Sarawak (hectares)

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Mature Immature

10-year CAGR = 10.5%

Source: CIMB, MPOB

Figure 17: P&L analysis (RM m)

FYE Dec 2009 2010 2011 2012F

Revenue 439.0 520.0 491.7 498.7

Operating Profit (EBIT) 187.2 273.8 279.6 288.1

Depreciation (31 .3) (103.9) (110.9) (105.1)

Interest Income 17.6 13 .4 12.9 9 .8

Pretax Profit 173 .5 183.3 181.6 192.8

Effective Tax Rate (%) -25.0% -23.9% -6.0% -18.0%

Net Profit 128 .8 139.4 170.7 158.1

Operating Marg in (%) 42.6% 52.7% 56.9% 57.8%

Pretax Margin (%) 39.5% 35.2% 36.9% 38.7%

Net Margin (%) 29.3% 26.8% 34.7% 31.7%

Source: Company, CIMB

[ 13 ]

Figure 18: Balance sheet (RM m)

FY09 FY10 FY11

Total Assets 2,082.8 2,030.3 1,935.3

Fixed Assets 1,685.4 1,651.8 1,569.2 Current Asset 397.5 378.5 366.0

Other LT Assets 65.7 69.3 64.9

Current Liabilities 171.2 177.5 141.2

LT Liabilities 1,261.6 1,213.3 1,133.9

Share Capital 400.0 400.0 400.0 Shareholders' Funds 650.1 639.5 660.2

Source: Company, CIMB

Investment risks

Downward revision of LNG tariff? Petronas has been lobbying for a downward revision of Bintulu Port’s tariff for the handling of LNG vessel calls. A downward rate revision would have a significant impact on earnings given that LNG contributes a significant portion of revenue.

A tariff cut would be mitigated by reduced port lease charges and tariff increases for the non-LNG cargoes. Biport will attempt to neutralise the reduced LNG tariff with an appropriate increase in non-LNG tariff, resulting in very minimal impact on its earnings.

Competition in container segment could squeeze margins. There are several nearby ports in Sarawak, located in Miri, Sibu, Sarikei and Kuching. This could increase competition for transhipment boxes in the region. However, Bintulu Port has an edge in its stronger liner connectivity to the wider Asian region. The proposed Samalaju Port also has the advantage of being closer to the Samalaju Industrial Park where the major projects will be located.

Global economic slowdown. A slowdown of the global economy could depress trade between countries and affect Bintulu Port’s cargo throughput and its earnings. In 2008, Bintulu Port experienced a 14.4% drop in containerised cargo throughput due to the global financial crisis.

Single customer exposure. With LNG constituting a large chunk of revenue, Biport is highly dependent on Petronas’s LNG exports. A slowdown in demand for these exports would materially dampen earnings although in the current environment of strong energy demand, this scenario seems unlikely.

Capex could be higher than expected. We have not factored in Biport’s capex for the new Samalaju port which is estimated at around RM1.8bn. If the actual capex goes above this figure without the appropriate tariff hikes or attractive funding terms, this could materially impact Biport’s ability to pay dividends.

Score fails to take off. As Biport’s non-LNG growth is heavily reliant on cargoes from Score projects in the long-term, earnings could be substantially impacted if projects fail to materialise. A recent example, Rio Tinto Aluminium terminated the proposed smelter project at Score as they were unable to agree on the terms of the pricing and supply of electricity.

[ 14 ]

Valuation Balance sheet remains healthy. As at end of 2011, Biport remained in a net cash

position with no debt on its books. This could change if it decides to use debt to fund the construction of Samalaju Port. Biport is also consistently generating positive operating cashflows each quarter.

Minimal earnings growth from 2011 to 2014. We forecast 3-year earnings CAGR of merely 1.2% for Biport, with higher earnings growth expected in the later years. For FY12, we are expecting a slight dip in net profit as Biport recognised about RM30m capital allowances last year for investments made in FY08-11. From FY12 onwards, capital allowances are likely to be around RM10m. The investment tax allowance rate approved is 60% for qualifying capital expenditure such as the expansion of the container terminal.

By 2014, we expect several major projects at Score to be completed and this should enhance import and export volumes. However, earnings growth is not likely to be substantial as the industries are still at the early stages and space constraints at the port could hinder volume growth. Typically, a new port may take several years before making a profit.

Trading at a premium over NCB Holdings. The share price chart in Figure 20 shows that NCB Holdings has outperformed Biport over the past year, probably due to a 59 sen special dividend declared by NCB in June 2011. Biport’s P/E and P/NTA, however, are still at premiums over NCB’s. We think that a premium is justified given Biport’s higher dividend yield and larger market capitalisation. But NCB’s average daily trading volume is twice that of Biport.

Biport’s assets are low as it does not fully own all the immovable assets and facilities, but merely leases them from the government. However, Biport does own all moveable assets. The low assets probably explain why Biport is trading at a much higher P/NTA than NCB.

Figure 19: Comparative valuations

Bintulu Port NCB Holdings

Share Price (RM) @ 27/04/12 7.02 4.39

Mkt. Cap (RM m) 2,808.0 2,064.0

Ave. Daily Vol. (m) 41,476.0 89,457.0

P/E FY11 (x) 16 .4 17.4

P/E FY12 (x) 17 .8 16.1

P/NTA (x) 4 .3 1.2

Yield FY12 (%) 5 .3 3.4

Source: Company, CIMB estimates

Figure 20: Share price chart of Biport and NCB Holdings (RM)

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Dec-08 Jul-09 Jan-10 Aug-10 Feb-11 Sep-11 Apr-12

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Bintulu Port - LHS NCB Holdings - RHS

Source: Bloomberg

[ 15 ]

Recommendation

Initiate with a Hold recommendation. We have a target price of RM7.30 based on

DCF valuation and a WACC of 8%. We use the DCF method due to the stable and recurrent nature of Biport’s cash flows. Despite the solid dividend yield of 5.3%, it is unlikely to attract much interest from investors due to its tepid earnings growth in the near term and low liquidity.

Maintaining dividends. While the Samalaju Port will require substantial capex in the early years, management is committed to paying dividends at levels similar to 2011. Last year, Biport declared a quarterly interim net dividend of 7.5 sen and a final net dividend of 7.5 sen, bringing total net dividends to 37.5 sen. We believe that the company will be able to sustain this amount as it is generating healthy cashflows each quarter. As far as we know, there are no intentions to raise this dividend figure.

Score an earnings catalyst. At the moment, the port is still very reliant on earnings from LNG calls which will not see substantial growth in the near term due to capacity constraints. However, in the medium- to long-term, we believe that projects and investments at Score will pick up and this could elevate the volume of cargo moving through Samalaju Port and Bintulu Port. This will have a major impact on Biport’s long-term earnings.

Financial summary

FYE Dec 2010 2011 2012F 2013F 2014F

Revenue (RM m) 520.0 491.7 498.7 514.0 534.2

EBITDA (RM m) 273.8 279.6 288.1 297.3 311.2

EBITDA margins (%) 52.7 56.9 57.8 57.8 58.2

Pretax pro fit (RM m) 183.3 181.6 192.8 201.3 214.8

Net profit (RM m) 139.4 170.7 158.1 165.0 176.2

EPS (sen) 34.9 42.7 39.5 41.3 44.0

EPS growth (%) 8.3% 22.4% -7.4% 4.4% 6.7%

P/E (x) 20.1 16.4 17.8 17.0 15.9

Core EPS (sen) 34.9 42.7 39.5 41.3 44.0

Core EPS growth (%) 8.3% 22.4% -7.4% 4.4% 6.7%

Core P/E (x) 20.1 16.4 17.8 17.0 15.9

Net DPS (sen) 37.5 37.5 37.5 37.5 37.5

Dividend yield (%) 5.3 5.3 5.3 5.3 5.3

P/BV (x) 4.4 4.3 4.2 4.1 4.0

ROE (%) 21.6% 26.3% 23.8% 24.4% 25.3%

Net gearing (%) nil nil nil nil nil

Ne t cash per share (RM) 0.68 0.62 0.55 0.51 0.50

P/CF (x) 18.0 14.8 16.2 15.4 14.4

EV/EBITDA (x) 8.1 8.0 7.8 7.6 7.3

CIMB/Consensus (x) 0.91 0.93

Source: Company, CIMB Research, Bloomberg

[ 16 ]

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