This article first appeared in The Edge Malaysia Weekly, on October 26 - November 1, 2015.

MANY thought that Tan Sri Syed Mokhtar Albukhary’s game plan of having his flagship MMC Corp Bhd acquire a substantial stake in NCB Holdings Bhd was to pave the way for an asset injection exercise — a strategy the tycoon is well known for.

Last week, the market was caught by surprise when MMC announced that it wanted to take NCB, which owns Northport, private at RM4.40 per share, or RM1.44 billion in total.

MMC has sealed a deal with Permodalan Nasional Bhd (PNB) and AmanahRaya Trustees Bhd to take over the 53.4% stake held by the two in NCB for RM1.1 billion cash, or RM4.40 per share.

If this acquisition goes through, MMC’s interest in NCB will balloon to 83.6% from 30.1% currently, and will trigger a mandatory general offer for the remaining 16.4% stake the diversified conglomerate does not own. The MGO would cost MMC about RM340.5 million.

Port operation is one of MMC’s core businesses. Besides Northport, NCB also owns logistics outfit Kontena Nasional Bhd.

“The proposed acquisition is strategic as MMC expands its presence in the port business. MMC may be able to gain operational and cost synergies, which will further enhance the financial performance of its port and logistics divisions,” the group says in an announcement to Bursa Malaysia.

It does make commercial sense for MMC to take over Northport, but some analysts say MMC might be paying too much for it, especially when one looks at NCB’s declining earnings over the past five years.

But those who are familiar with Syed Mokhtar can’t imagine him sealing a raw deal.

Maybank Investment Bank says in a report that the offer of RM4.40 is 17% below its discounted cash flow-derived target price of RM5.30, but advises NCB’s shareholders to accept the offer.

It adds that at RM4.40, NCB is the most expensive port in the region. It is valued at a price-earnings ratio of 39 times and EV/Ebitda of 10 times.

UOB Kay Hian says RM4.40 is a fair acquisition price for a controlling stake.

At that price, the transaction value of NCB is at 9.8 times the forecast EV/Ebitda and 1.4 times the book value. “Given the block size, we opine the price consideration is reasonable,” says UOB Kay Hian.

Other analysts doubt if NCB’s earnings can sustain the borrowing cost that MMC will incur.

“We believe MMC’s 2016E earnings may drop 6.5%, as we estimate the higher finance cost from issuing a debt of RM1.4 billion to privatise NCB will outweigh the consolidation of NCB’s earnings, assuming a conservative 5% growth in NCB’s annualised earnings for FY2015,” says Affin Hwang Investment Bank Bhd.

“Assuming an interest rate of 5%, MMC would incur an additional after-tax financing cost of RM54 million versus NCB’s annualised 2015E earnings of RM37 million. MMC’s gross debt/equity will increase from 0.8 times to 0.95 times with the privatisation exercise.”

As at end-June, NCB had a cash balance of RM385.2 million, long-term debt of RM387.7 million and short-term borrowings of almost RM77 million. The port operator’s net asset value was RM2.93 per share.

NCB’s net profit shrank to RM27.85 million in the financial year ended Dec 31, 2014 (FY2014), from RM148.7 million in FY2010.

For the six months ended June 30, NCB posted a net profit of RM18.6 million, or four sen per share, on revenue of RM390.2 million. NCB’s financials, however, were dragged down by Kontena Nasional, which suffered a pre-tax loss of RM19.5 million.

Port officials’ views

A port official who spoke on condition of anonymity feels that MMC’s takeover of NCB for less than RM2 billion is a good bargain.

“If PNB had offered NCB to other bidders, I bet there would have been keen interest, especially with the weak ringgit,” he says. The official opines the port is worth the money if it is managed well.

“A few critical mistakes were made by the management previously … but there is much value in NCB,” he adds.

He highlights that the upcoming increase in port tariffs, which is scheduled to take effect next month, should be a boon for NCB. An initial 15% tariff hike will be followed by an additional 15% come September 2018.

Currently, the container handling charges are RM140 per TEU (twenty-foot equivalent unit) for transhipment cargo and RM230 for import and export boxes.

Other catalysts include NCB’s upgrading of Berth 8, which will operate a 400m berth, to be completed in 2017. This will attract larger vessels and nudge up NCB’s container handling capacity to 6.2 million TEUs from the current 5.6 million boxes.

Last year, Northport handled almost 2.6 million TEUs, which means that it still has capacity to generate more revenue.

Another port executive says Syed Mokhtar also controls Penang Port — Malaysia’s northernmost container handling facility — and Port of Tanjung Pelepas in Johor, the southernmost state. He also owns Johor Port Bhd. “He (Syed Mokhtar) will integrate the three ports.”

Apart from integrating his port business, Syed Mokhtar is likely to consolidate Kontena Nasional with his logistics business — Konsortium Logistik Bhd, which is wholly owned by DRB-Hicom Bhd, and JP Logistics Sdn Bhd, which is wholly owned by MMC. Syed Mokhtar, through Etika Strategi Sdn Bhd, has a 55.9% stake in DRB-Hicom.

The port executive also says Kontena Nasional has a choice landbank. NCB’s latest annual report shows that Kontena Nasional has 18.5 acres in Jalan Kelang Lama, Kuala Lumpur, with a net book value of RM60.3 million; 32 acres in Port Klang, valued at RM40 million; 10 acres in Port Klang, valued at RM26.5 million; and 35 acres in Pasir Gudang, Johor, with a net book value of RM20.4 million, among others.

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