Investment Highlights

• We upgrade Westports to BUY from HOLD. We raise our FY19–21F net profit forecasts by 9.6%, 10.5% and 11.8% respectively, and increase our FV by 20.1% to RM4.73 (from RM3.91) based on 23x FY20F EPS (from 21x). We now value Westports in line with its average 5-year historical forward P/E of 23x (vs. a discount previously) as its strong 1H results have alleviated our concerns on the negative impact of the US-China trade war on the port. We believe the port has instead benefited from the trade diversion arising from the trade war.

• Westports' 1HFY19 net profit beat expectations at 52% and 50% of our full-year forecast and full-year consensus estimates respectively (Typically, Westports’ 2H is stronger than 1H due to seasonal factors; In FY18, 1H made up 46% of Westports’ full-year earnings). The variance against our forecast came largely from the higher-than-expected container throughput achieved in 1HFY19, coupled with slightly better-than-expected margin enhancement from the revised tariff effective 1 March 2019 and some cost efficiency gain.

• 1HFY19 container volume grew 22% YoY thanks to: (i) the continuous growth in intra-Asia trade lane; (ii) the recovery in the Asia-Europe trade lane, offsetting the negative impact from the shipping alliance reshuffling 1– 2 years ago.

• The company raised its FY19F container throughput volume growth guidance of 3–8% to high single-digit growth. We believe Westports could do better. We raise our assumption to 12% from 4% underpinned by: (1) higher transshipment volumes backed by the buoyant intra-Asia segment (that contributed about 63% of its total container throughput volume in 1HFY19); and (ii) trade diversion from the US-China trade war.

• We like Westports as it has returned to its growth path following the loss of a major customer during a major reshuffling of the global shipping alliances in 2017. A 13% tariff hike effective from 1 March this year will help lift its margins and earnings. We also believe the seaport operator is a beneficiary of the trade diversion from the US-China trade war, as well as the improved ChinaMalaysia relations. China was one of Malaysia’s largest trade partner in 2018, contributing to 13% of Malaysia’s total external trade.

Source: AmInvest Research - 29 Jul 2019