$HARBOUR / 2062 (HARBOUR-LINK GROUP BERHAD) Q3FY24 Notes - Margins Continue to Expand; Machineries Segment is Surprisingly Strong and works in Sarawak are gaining Steam. Spends around RM 100mil to acquire 2 new containerships and Handling Equipment

Harbour sees their net profit continue to rebound from the lows, rising about 40% QoQ. This is their 3rd quarter of improving performance and the management continues to be optimistic about their future prospects. An unexpected boost actually came from their Machineries segment, which is currently the strongest performing segment in terms of RoA. This is a relatively new segment and it's great to see it doing so well.

Anyway, let's dig through what I think are some of the main highlights from the QR :

1. Gross Profit is RM 48.3mil, with GPM of around ~18.7%. Unlike most other companies, due to their sheer cash holding, Harbour generates another RM 6mil from interests and other income, which should be mainly from their MMF holdings. PBT ends up at RM 35.1mil, and PAT RM 29.5mil, with EPS of 6.06sen per share. Using TTM results, Harbour is now trading at roughly PE 7.3x. Using latest results for annualizing it, puts Harbour at roughly 6.6x forward PE.

Using ex cash calculations that some people love, would put harbour at about ex cash PE 1.9x-3x. (using either RM 450mil net cash or RM 350mil net cash). Take these numbers as you will.

2. Their cash and cash equivalents stands at RM 491.3mil, with borrowings of roughly RM 43.5mil, thus leaving net cash position at RM 447.8mil as end march. Bearing in mind, that this excludes the potential purchase of ~RM 100mil worth of 2 new containerships and other handling equipment, which would reduce the cash balance and be added to the PPE instead. NTA stands at RM 1.95 after the payment of 3 sen dividend last Q.

3. Operating Profit is RM 109mil (vs RM 69mil last 2Q), with NOCF at RM 85.2mil (vs RM 60.2mil last 2Q) in these 3 quarters. Cash flow continues to be good. Dividend paid out so far is only RM 38.4mil, more than supported by operating cash flows. Interestingly, they have raised proceeds from issuance of shares-- but I understand HARBOUR's outstanding shares had not changed. This is likely from one of their subsidiaries but I'm unclear about this at the moment.

4. Shipping segment revenue drops around 9% qoq due to the lower cargo volumes coming off from Christmas season (and CNY holidays). In spite of that, profit increases by around 12%. Freight rates in this region had rebounded compared to few quarters back, albeit slower than in Europe. Same goes for the integrated logistics segment; but they had a big jump in profits due to the uptick in O&G industries requiring special cargoes and handling.

5. Machineries trading segment also showed strong growth from the delivery of ship-to-shore container cranes.

6. Going forward, the management expects the shipping and marine segment to remain favourable and is expecting to see higher load factors and stable freight rates. They are seeing high utilization rates for their vessels, and they have bought 2 unit container vessels which will be delivered in mid-May and early June.

7. Integrated Logistics segment is expected to remain favourable too, with new project cargoes in Bintulu and other 3PL work in the O&G industries. They will buy more transport vehicles and handling equipment to cater for the increased cargo volumes they are seeing.

8. Machinery segment is seeing promising demand on earth moving machinery as well as material handling equipment. They are in the progress of bidding for more port equipment supply projects, and will achieve their sales targets (but didn't specify how much their sales target is).

9. Engineering and Construction segments should still remain a rather small part of the whole business, although the management is expecting a favourable outcome. At the very least, we may stop seeing losses being reported here?

10. Overall, the group expects to continue to remain stable and favourable.

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This is the first time in a while that Harbour is spending big CAPEX for expansion. In spite of all that, the cash balances will still be very robust and I think, other than global freight rates, the pick up of work in O&G and Sarawak in general seem to be doing very well for them.

The topic that very few cover is the impact of the reinstatement of the cabotage policy for Sarawak, which we should be seeing somewhere end of the year if no hiccups happen.

In last year's AGM, the management mentioned that they are trying to have a sustainable dividend policy while planning for buying new containerships. With this out of the way, I wonder if the management would be more comfortable being more generous with their dividends. Currently, the payout ratio is sitting at only near ~25%.