Investment Highlights

• We maintain BUY on Westports Holdings (Westports) with a lower fair value (FV) of RM3.82/share (vs RM4.35/share previously) based on a FY23F PE of 20x (vs 22x earlier), in line with its historical 3-year average, due to deteriorating macroeconomic headwinds. Our FV also incorporates a 3% premium to reflect its unchanged 4-star ESG rating.

• Westports’ 9MFY22 core net profit (CNP) of RM470mil was within expectations, accounting for 75% of our FY22F CNP and 76% of consensus estimates. However, looking ahead, we have reduced FY23F-24F CNP by 3% as higher fuel costs are expected to erode operating profit margins.

• Although operational revenue grew by 4% YoY, CNP fell 14% to RM470mil in 9MFY22 due to higher fuel cost (+81%) and the one-off prosperity tax.

• For 9MFY22, container throughput fell 6% YoY due to a 13% drop in transhipment throughput, cushioned by a 7% growth in gateway throughput. The drop in transhipment throughput was attributed to China’s Zero-Covid policy, ongoing geopolitical tensions and macroeconomic headwinds. The growth in gateway throughput was attributed to higher throughput by paper recycling plants in Banting. Nonetheless, container revenue grew 3% due to higher gateway boxes.

• Meanwhile, 9MFY22 conventional throughput grew 7% YoY – mainly in 3QFY22 – due to an influx of break bulk cargo, i.e. project cargoes for a power plant in Pulau Indah and paper recycling plants being set up in Banting, as well as higher liquid bulk, i.e. gasoline and diesel. Additionally, the commencement of Liquid Bulk Terminal 5 (LBT5) in 3QFY22, which facilitates the discharge and flow of Liquefied Petroleum Gas (LPG), also contributed to the handling of more liquid bulk. These resulted in a 19% YoY improvement of 9MFY22 conventional revenue.

• To capture the future growth of non-bunker fuel and liquid storage requirements, Westports will be commencing the construction of Liquid Bulk Terminal 4A (LBT4A) in 4Q2022.

• QoQ, operational revenue grew marginally (+1%) to RM516mil in 3QFY22 on the back of increased throughput (container: 4%; conventional: 22%) but CNP fell 7% to RM153mil affected by higher costs associated with the handling of break bulk cargo.

• On Westports’ cruise terminal operation, Port Klang Cruise Terminal (50:50 JV with Northport) swung into black this quarter after making losses since 3QFY21. We do not think that this relatively smallish segment will contribute meaningfully in the near term. Nonetheless, Westports plans to upgrade the facilities in the terminal to cater to improving demand.

• Although IKEA’s regional distribution centre and paper recycling plants in the vicinity is expected to contribute to Westports’ throughput, we remain cautious on Westports’ short-term outlook due to global macroeconomic headwinds. Nevertheless, over the long term, prospects for the port sector in Malaysia is positive underpinned by global trade and investments in the manufacturing sector that are expected to support inbound and outbound throughput growth. There have been significant manufacturing base relocations by MNCs out from China into the region due to rising labour and land costs, exacerbated by the US-China trade war. To capitalise on these, Westports has charted Westports 2.0, a mega port expansion project which is expected to double the port’s container handling capacity to 28 mil TEUs. We anticipate the expansion to make headway mid-next year.

• The stock is currently trading at a compelling FY23F PE of 17x, vs its 3-year average of 20x.

Source: AmInvest Research - 7 Nov 2022