Investment Highlights

• We raise our FY20–22F net profit forecasts by 14%, 5%, and 10% respectively, and upgrade our fair value by 9% to RM4.83 (from RM4.45 previously). Maintain BUY. We now value Westports at 23x its revised FY22F EPS (from 23x its FY21F EPS previously), in line with its average historical forward P/E. We believe seaport operators have emerged from the pandemic as economies, businesses and borders reopen, translating to a recovery in global trade, and hence improvement in seaports’ throughput.
• Westports’ 9MFY20 core net profit of RM514.1mil (excluding RM23mil one-off items such as written-off PPE and impairment on trade receivables) beat expectations, coming in at 83% and 85% of our full-year forecast and the full-year consensus estimates respectively. We believe the variance against our forecast came largely from a lowerthan-expected contraction in its container throughput volume for 9MFY20, i.e. at only -4% YoY vs. our full-year FY20 assumption of -9%.
• We now assume in our forecasts a smaller FY20 contraction in its container throughput of -1% (vs. -9% previously), but a lower growth in FY21F of 3% (vs. 7% previously) due to the high base effect. The upgrade in our assumption is also to reflect Westports’ guidance for a “low-to-flat YoY contraction” in its container throughput volume for FY20F, followed by a low single-digit volume growth for FY21F, underpinned by recycled paper processing activities, rubber-related and fertilizer manufacturing locally, coupled with the recovery in global trade.
• For 9MFY20, Westports container throughput volume declined by 4% YoY. An 8% YoY contraction in transshipment throughput (as the pandemic hit the global trade), was cushioned by a 5% YoY increase in gateway throughput (driven largely by the recycled paper processing activities locally, and healthcare/hygienic related products).
• Interestingly, the recovery in transshipment throughput in 3QFY20 (+30% QoQ) was partially aided by the repositioning of empty containers by shipping companies. Empty containers constituted 25% of the total container throughput volume during the period. Meanwhile, typically, transshipment contributes to two-thirds of Westports’ total throughput with the balance one-third coming from gateway cargoes.
• Despite the contraction in container throughput volume, its 9MFY20 core net profit grew strongly by 11% YoY, driven largely by: (1) a 9-month impact of an effective 13% hike in container tariff (from 1 Mar 2019), vs. only a 7- month impact in 1HFY19; (2) a slight change in product mix with an increase in high-margin gateway cargoes (at the expense low-margin transshipment cargoes); and (3) higher incomes from value-added services, particularly, reefer services.
• On the Westports 2.0 expansion plan – comprising eight new terminals, CT10 to CT17, which will double its container handling capacity to 28mil TEUs from 14mil TEUs – Westports has obtained the green light from the Economic Planning Unit under Prime Minister's Department for its expansion plans, while it continues to work on the land use conversion. Meanwhile, its negotiation with the government on the concession terms is still ongoing with slight delays. Westports guided for a conclusion of the negotiation by early next year (vs. the end of this year guided previously). On a positive note, Westports has finalised its concession terms with the Port Klang Authority and completed the detailed Environmental Impact Assessment (EIA).
• Westports has decided to temporarily trim its dividend payout ratio to 60% (but to maintain with the semi-annual dividend payment). This is to conserve cash for 2021 when new container terminal expansion project is expected to commence.
• Looking beyond the pandemic, the outlook for the port sector in the region (Malaysia included) is resilient, underpinned by global trade and investments in the manufacturing sector that generate tremendous inbound (feedstock) and outbound (finished product) throughput for ports. There have been significant relocations of the manufacturing base by multi-national companies out of China to the region due to the rising labour and land costs, exacerbated by the US-China trade war. Westports has charted a long-term expansion plan to capitalise on these.

Source: AmInvest Research - 27 Nov 2020