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random
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Posting #1: Wed Sep 5th, 2007 17:18 |
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NCB HOLDINGS
NCB basically consists of 1) Northport and 2) Kontena Nasional
1) Northport
Northport is one of 2 sea ports in Port Klang (the other being Westports). It is basically involved in port operations with
two container terminals in operation (KCT and KPM or CT1 and CT2). Northport mainly handles containerized cargo but also has a conventional port
It is also in the warehouse and distribution business throught Northport Distrepak Sdn Bhd
2) Kontena Nasional
KN is a freight forwarder, haulage and logistics service provider. KN was the first haulage company in Malaysia and now has 600+ prime movers. KN also has warehouses to supplement its haulage arm; being able to offer logistics solution all the way up the supply chain.
EARNING REVIEW & OUTLOOK
Revenue Net Profit Net Margin
2002 747.006 67.424 9.0%
2003 734.467 91.814 12.5%
2004 800.262 98.935 12.4%
2005 806.571 95.441 11.8%
2006 834.002 116.164 13.9% |
Receivables Cash Debt Nett cash
2002 129.302 315.256 0.0 315.256
2003 136.914 402.754 0.0 402.754
2004 130.026 488.050 0.0 488.050
2005 148.117 556.448 1.4 555.048
2006 134.526 609.361 0.8 608.561 |
figures in Ringgit Millions
Here are the figures for the last five years. Stable earnings, not much growth, nice fat margin. Receivables look like they haven't been reduced at all but I'm not worried about it. We'll look into it in detail. Cash pile has been growing and done with no or negligible debt
Port Operations
Revenue PBT Margin
2002 529.014 97.916 18.5%
2003 563.142 136.630 24.3%
2004 623.818 212.003 34.0%
2005 605.505 188.342 31.1%
2006 634.959 201.929 31.8% |
Pretty impressive set of numbers. Check out the big fat margin. This is how profitable the port business is. 30% margin. :s50: And the best part is the business is almost cash based. Why almost? Because the importer has to pay the expenses before collecting his cargo so there is very little risk of bad debts (unless he doesn't want his cargo)
The storage of cargo in port (whether container or loose goods) is calculated by days. So the more days the container spends in the port, the more the bill will rise exponentially upwards. Hence the receivables figures for the port operations may appear large but the risk is low since their cost is very minimal. What they manage they collect on overdue customers are mainly profits
Haulage/Logistics Operations
Revenue PBT Margin
2002 217.992 11.040 5.0%
2003 170.079 4.062 2.4%
2004 184.763 (4.440) -
2005 208.556 (5.397) -
2006 209.590 3.523 1.7% |
Clearly something is wrong hear. Started with paper thin margins and erodes all the way. Went into the red in 2004.
Management explains it as a result of intense competition arising from liberisation of the haulage business and rising fuel costs.
The story goes like this, once upon a time, the haulage business was controlled by a few major players. So there was very little competition. Customers had no choice. Then one day the big shots decide to let other people have a crack at the haulage pie. And boom, reality hits. Suddenly there was work to do!
KN was one affected. Years of complacency must have affected them as they watched their customers run to the new hauliers. Margins suffered until they start losing money. Seriously if you cannot make money in a monopoly business how to you expect to survive when you have to compete? Says a lot of the management doesn't it?
Anyway not all is bad news, being the government logistics arm is still useful. KN still gets most of the large projects.
PROS & CONS
Pros
It's a Port!
The jewel in NCB Holding's crown is undoubtly Northport. The port business is one of the better business models ever. Cash (almost), recurring income, nice fat margin and lasts forever. There will be people selling (export), people buying (import) and people moving stuff around (transhipment). Some make money, some lose money but the port always wins. Doesn't this remind you of a certain stock bourse business ? :s25:
High Dividend Yield
NCB has been generous in paying out dividends. Here are the past dividends paid out
2002 8.0 sen
2003 12.0 sen
2004 15.0 sen
2005 15.0 sen
2006 26.5 sen
2007F 17.0 sen |
At this point of writing, NCB has declared an interim dividend of 5 sen less tax with another expected 12 sen later in the year. At the current price of RM3.00 it translates to a yield of 5.7% which is pretty attractive. if you ask me.
The good news is judging from track record NCB has been slowly increasing its dividend. And from its enormous cash pile and table earnings outlook, maintaining or even increasing dividends should not be a problem.
(There is a rumor of NCB increasing its dividend to 20 sen per year as according to The Star.
http://www.biznewsdb.com/english/newspage/newspage1.asp?ID=7041017&file1=7&bulan=04&kw=ncb )
Cash rich
Again the neverending conundrum of cash rich companies.. Is it really a pro? If you buy into a cash rich company its not like suddenly you're entitled to it... unless you take over the company then that's a different story. Anyway, looking at the latest quarterly announcement, NCB has RM589,522,000 in the bank which translates to.... RM1.25 per share. Wow! Not bad right ? So what about their cash management over the years? Let's take a look at their piggy bank over the years..
2002 RM 333,060,000
2003 RM 402,754,000
2004 RM 488,050,000
2005 RM 556,448,000
2006 RM 609,361,000
2007 Q2 RM 589,522,000 |
Cash management looks pretty OK and amount has been growing steadily (NCB paid extra special dividend in 2006 of 9.5 sen)So no wanton spending of their cash resources and as far as I can tell no meddling in unnecessary investments.
Stable and steadily growing earnings
With ports, it's all about VOLUME! The more volume the more the port earns. In port talk, volume is measured in terms of TEUs (Twenty foot equivalent). So one 40'container is 2 TEUs and one 20' is 1 TEU (duh!). Northport managed a throughput of 2.7 mil TEUs for fY2006 with 5% projected growth for 2007
Northport's current capacity is 4 mil TEUs so there is still a 32.5% upside to optimum capacity. Northport has also plans for a RM500 mil expansion to increase this capacity to 5 mil TEUs.
Other expansion plans in the ropes are the redevelopment of Southpoint,a smaller port used mainly for regional trading
Undemanding valuations
At current prices, NCB is trading at 12.15X FY2006 earnings and 6.6X if you strip off the cash. Compared to its local listed peers such as BIPORT (19.5X) and SURIA (19.2X). Can't really compare to MMCCORP since it's not a pure port operator.
Or if you prefer NTA, last reported NTA was RM3.51 so its trading at a 15% to its NTA
Cons
No Goreng factor
This counter is boring. Not much price action. Low volume. No syndicate play. No nice juicy rumour. This counter has been trading withing the RM2.50 - RM3.50 band for god knows how long. And considering the stock is tightly held by PNB and MISC, its no wonder the stock is thinly traded
Loss of market share to West Port
Currently Northport holds approx 40% of total market share in Port Klang, down from 51% in 2002. This might sound alarming but I assure you its not. NCB earnings has been increasing steadily even as market share is dropping. This is because the whole pie that is Port Klang is growing.
Kontena Nasional
So this bugger has been a drag on NCB's earnings. A quick look at other peers shows that the haulage business is indeed feasible, just that better management is needed. Anyway to give credit to KN it is showing signs of a turnaround. If indeed they are successful it would be a great boost to NCB's earnings as a whole. (Or maybe they should exit the business altogether) :s35:
Recommendation
BUY. But you might wanna see if you can get at lower prices for extra upside. The way I see it this counter has limited downside (barring a market crash which it would be wise to exit all equities anyway). Potential catalyst include sudden market rerating, turnaround of its haulage arm, possible M&A ?
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stockraider1
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Posting #2: Wed Sep 5th, 2007 17:42 |
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To add the positive comment;
1)Recently the Govt had approved and finance deepening of Northport which allow very large ship to berth shorthening the sailing time to be cut to 1 day compare with 3 previously.
2)The positioning of NCB as a Halal Hub.
3)Potential privatization in view of PNB holding big share and trading at a discount.
4)Strong operating cashflow
Negative.
1)Revenue Growth rate of only 3% to 5% compare to westport of 11% and Msia GDP growth rate of 6% p.a hence under performance.
2)Margin is being squeeze bcos of competition by Westport and losing mkt share and no pricing power.
Overall.
Risk reward still favour NCB in view of the cash holding and its stable business.Earnings Yield easily exceed 8% p.a.excluding growth
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random
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Posting #3: Wed Sep 5th, 2007 18:05 |
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Hi Stockraider1,
Many thanks for the useful insights. In response to your comments I would like to add some of my own:
1)Revenue Growth rate of only 3% to 5% compare to westport of 11% and Msia GDP growth rate of 6% p.a hence under performance.
Very true that growth for its port operations is very limited. Northport is a mature port compared to Westports which has a whole island on which to expand on. However, Northport has managed to retain its customers. There are certain advantages that Northport still holds over Westports and retaining its customers should not be a problem.
2)Margin is being squeeze bcos of competition by Westport and losing mkt share and no pricing power.
This point I would have to disagree with you. As you can see margin from the port operation is very good (approx 30% before tax). Pricing is fixed so there is no price competition between Westport and Northport ( To go into a pricing war would be silly for both of them since it is a duopoly ).
The immediate catalyst would be KN itself. If this shackles were removed I would expect an instant rerating of the company. But as it is it is unlikely that NCB will exit the haulier business with KN being the first and largest haulier in the country (National pride at stake?)
However KN is slowly changing priorities. They are now more focused on project cargo for their haulage and are moving up the supply chain where the margins are better i.e. warehousing, distribution etc
So no more focusing on price wars with the other hauliers. Being large in size matters as KN would be able to handle large volume whereas a smaller player may not.
Another avenue of growth for Northport would be the transhipment business. These containers just pass by Malaysia and are not meant for local use. In other words, transit. So it is not affected by the country's GDP growth and trade.
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Moolah
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Posting #4: Thu Sep 6th, 2007 02:14 |
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My dearest Random,
Extremely impressive write-up. Need to read it in detail before I can comment more.
Privatization is never a positive issue for the investor.
It's a limitation exercise where the investor is never fully compensated for taking the risk in investing in the stock.
What it means is... you the investor get to FULLY share the stock price downside with the majority shareholder but as things improve, your upside is capped by the privatization issue.
Downside unlimited, upside limited.
Does this sound like a nice game to play for the investor?
Yeah, don't even dream about getting a 5 bagger here!
Oh yeah.... one could gamble for the privatization thingee and one could get rewarded BUT the reward simply does not justify the risk of one risking one's money investing in the stock market.
Will comment on NCB later.
:s81:
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Moolah
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Posting #5: Thu Sep 6th, 2007 02:46 |
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My Dearest Random,
I am looking at the haulage numbers posted by NCB from their latest quarterly earnings. Current half year fiscal earnings 2007, NCB's haulage/logistics operations netted a profit of 4.117 million from a revenue of 317.195. A razor thin margin of 1.3%. And I would dearly agree with you that it's certainly not a business to die for.
However, I am thinking out loud here. Doesn't the haulage business compliment its Ports business?
Just thinking hor.. say i got a couple of containers of goods to be shipped overseas. Well i would need a hauler to transport them to the port, right? And with NCB having this haulage business, then wouldn't NCB be providing its customers an extended service? ( Do correct my mumbling here cos I seriously do not have that much xp on what exactly happens. )
Dividend and cash.
2002 8.0 sen
2003 12.0 sen
2004 15.0 sen
2005 15.0 sen
2006 26.5 sen
2007F 17.0 sen |
Err.. in fy2006 NCB paid 26.5 sen? Wah. That's simply grand.
For me.. if i am an investor... err... given NCB nice little piggy bank, i would dearly wish for a better set of dividend pay out this year.
For me.. having a company with a nice piggy banks is simply fabulous but in general, i strongly believe that the investor should not be too complacent with this issue. This is simply because at the end of the day, the management has the final say on what the company does with the cash. Yes, the shareholders can wish and demand for more but sometimes life simply isn't perfect. Take for example, the blog posting on EPIC. Company had the cash but it ended up with a dismal investment. Just an example only.
Having mumbled all that, yes it is great that NCB has such a nice little piggy bank.
And yes, i do agree with that right now, NCB is simply had done by the market simply because it's not a sexy stock.
rgds
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prophet
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Posting #6: Thu Sep 6th, 2007 02:56 |
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Dearest Moolah
Can you explain more on the privatisation thingy? viz
"Privatization is never a positive issue for the investor.
It's a limitation exercise where the investor is never fully compensated for taking the risk in investing in the stock.
What it means is... you the investor get to FULLY share the stock price downside with the majority shareholder but as things improve, your upside is capped by the privatization issue. "
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Moolah
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Posting #7: Thu Sep 6th, 2007 03:11 |
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prophet wrote:
Dearest Moolah
Can you explain more on the privatisation thingy? viz
"Privatization is never a positive issue for the investor.
It's a limitation exercise where the investor is never fully compensated for taking the risk in investing in the stock.
What it means is... you the investor get to FULLY share the stock price downside with the majority shareholder but as things improve, your upside is capped by the privatization issue. "
m8,
Simple example, you took the investment risk in investing in Cowland because you find value in the company. Say you purchase it at 5.00 because you felt this Cowland should simply be worth easily 15.00. That's your opinion and your valuation. So you decided to take the risk of investing in it in the stock market.
As you know, the stock market is simply full of risk. Which means your investment could go to zero if the Cowland screws up as a company or say the stock market plunges. Right? That's your investment risk which is downside unlimited.
So if the downside is unlimited, don't you want ur upside to be unlimited too?
Won't it be terrible if the Cowland owner, the gangsta Cow, comes in make a privatization of it at 6.00?
Now, yes, in a way, you get a return of investment of around 20%.
But...
was it fair if your value of Cowland was 15.00??
See how the privatization offer capped the upside?
And this is my definition of a limitation exercise.
rgds
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prophet
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Posting #8: Thu Sep 6th, 2007 03:38 |
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Oh i was thinking of anothet type of privatisation! 
Privatisatuon of govt services! Sorry wrong number here.
i get what you mean.
Thanks
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stockraider1
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Posting #9: Thu Sep 6th, 2007 04:38 |
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Random,
Following ur feedback the key area to assess NCB are as follows;
1)Competition
What is the key competitive advantage of NCB agst Westport which allow them to retain its customers ?
2)Margin
a)It is maintaining at healthy level bcos there is no price to gain mkt share.
b)But then NCB is losing mkt share ie Growth of 4% v Economy 6% v Wessport 11%.
c)Basing on this scenario investment in NCB is like a Bond which give a cashflow yield of 8% p.a. and a growth of 4% p.a.
Shortcut Using Peter Lynch principle if we substitute 4% growth with yield we get another 4% yield.This means NCB is a bond yielding 12% p.a.The market return for layback investor is 7% to 8% p.a.Thus NCB intrinsic value will be valued at 12%/8% x Rm 2.90 = Rm 4.35 which is still a good gain.
3)There will be increasing their capex going fwd which will drain some of their cash but whether this will generate higher return need to be assessed.
On the issue of Privatization and issue raised by Moolah and assuming we use this Scenario if PNB cost of fund is only 6% p.a. They will be able to afford to takeover NCB at Rm 4.35 and still make money out of it.From past record PNB are aggressive in takeover such as koa, Pelangi,Petaling Garden, CCM, MIDF and etc hence if there is a possibility of receiving a takeover offer say at Rm 4.35 for NCB is not a bad idea isn't ?
Anyway takeover are part of free mkt forces which is good for the mkt especially the current depress prices, in fact this is a wayout for the minority shareholder whose stocks is constantly depressed due to neglect.Anyway for me i will rate a stock higher when it has a possibility being taken over compare to it not.
Anyway based on current depress condition at least 60% of the counters is trading below intrinsic value hence no problem in finding another good investment alternative.
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random
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Posting #10: Thu Sep 6th, 2007 06:52 |
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Dear Moolah,
Nice set of comments. I never thought privatisation was such a grand thing to begin with. Though it could be a possibility. There are tons of catalysts that we can speculate on; privatisation, capital repayment, higher dividend and it will remain just that; speculation (though the last part is very feasible)
2006 had a special dividend of 9.5 sen and I believe there will be more income distributed back to shareholder. Their cashflow is strong and the piggy bank will keep on swelling up.
On the haulage side, actually Northport is operating its own haulage side for moving containers to and fro within the port. KN doesn't do that for them. But to control the supply chain you do need haulage, though outsourcing is a very common theme these days.
I believe there will be more upside with the turnaround of KN. But a quick look at peers show that margins indeed are thin (2 - 3 %) but this are done with high gearing whereas KN has paid off its debt. But KN is in the midst of selling off their old prime movers and replacing them with new ones so the efficiency might go up a bit.
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