1H18 core performance was in line with expectations. Positive takeaways include: a) continuous surge in gateway volumes (which boosted net yields); b) transshipment volume reverting to growth since Jun 18; and c) no foreseeable delays in tariff hike. Nevertheless, management retains its volume guidance for 2018. If the transshipment growth can sustain, this should alleviate uncertainties from the local economy and global trade wars. Maintain HOLD on WPRTS and target price of RM3.35. Entry price: RM3.10.

RESULTS

1H18 core profit in line with expectations. Westports Holdings’ (WPRTS) 1H18 core profit met 47% and 44% of our and consensus 2018 estimates respectively. This is in view of a stronger 2H18 from an incoming 15% tariff hike in Sep 18. Core earnings excluded RM0.4m asset disposal gains, RM1m net forex gains and net RM0.2m reversal of receivables. The 1H18 volume decline was in line with management’s guidance and our forecasts. A RM0.05 interim DPS was declared (1H17: RM0.06), based on its fixed 75% payout.

Gateway surged to all-time high, offsetting transshipment weakness. In 2Q18, WPRTS recorded 2.25m TEUs in throughput (+1% yoy, 0% qoq). Gateway volumes continued to breach new highs at 0.81m TEUs (+14% yoy, +5% qoq), with 80% of export boxes laden. This offset the weakness in transshipment volume of 1.43m TEUs (-6% yoy, -3% qoq) due to the volume realignment from M&A and new alliances among shipping liners since Apr 17

STOCK IMPACT

Container net yields improved. WPRTS achieved 4.5m TEUs (-3% yoy) in volumes in 1H18, split between transshipment (-13% yoy to 2.92m TEUs) and gateway (+20% yoy to 1.58m TEUs). Although the volumes are largely on track vs our 2018 forecast of 9.3m TEUs (transshipment: 6.5m, gateway: 2.8m), the improving high-yielding gateway mix is a positive result. Due to this, WPRTS net container yield in 1H18 improved strongly by 6% yoy to RM207/TEU, assuming 1.54 TEU per container and excluding cost of container rebates. This compares to our 2% growth assumption for 2018 gross container yields. On the flip side, cost of sales for items such as fuel (+15%), manpower (+9%) and depreciation (+20%) increased in 1H18.

Retains volume guidance of single-digit growth. Overall, 2H18 is expected to be stronger. We gather that on a monthly basis, the transshipment volumes from Jun 18 were recording yoy growth. Hence, due to the organic growth from the new base postalliance realignments, it appears that the transshipment is starting to revert to yoy growth. In our previous company update, we note that some of the shipping liners have slightly increased port calls for several routes, including the Asia-Gulf and Asia-Africa trade lanes. Although it is unclear if overall vessel frequencies and port calls have increased, it may provide visibility on volume increases from 2H18. Management also does not see any potential delay to the implementation of the second round of tariff hike (13-15%) at around Sep 18.

Trade wars and direction of Malaysia’s economy clouding near-term catalysts. We gather it is still too early to gauge if a prolonged global trade war will be a serious concern to Westports’ earnings. The direct impact on WPRTS should be small nevertheless, given that Asia-America trade lane comprises 8-9% of Westports’ total volumes. It is also possible that the port may gain in transshipment volumes if the trade flows shift towards Intra-Asia lanes. On gateway, the improved consumer spending after the removal of the Goods and Services Tax (GST) in June may be perceived to be positive for gateway volumes at least for 3Q18. However, the delays in mega infrastructure projects could be the offsetting factor.

8 detailed studies carried out for CT10-19 expansion (Westports 2). Overall potential capacity is expected to double to 30m TEUs. Several factors were considered, including: a) Port Klang’s South channel entrance at Pintu Gedong, b) minimal dredging where possible for environmental and cost considerations, and c) avoid altering the natural surrounding current patterns. The group will acquire a 154-ha land owned by PKNS by Dec 18 for RM116m. Of this, RM43m was incurred in 1H18 capex outflow as progressive payment to PKNS.

EARNINGS REVISION/RISK

We retain our 2018-20 net profit forecasts, which assume the 15% tariff hike by 2H18.

Risks. a) Uncertainty of trade wars; b) fuel costs may impact Westports’ earnings; and c) shipping customers’ margins are affected by rising fuel costs, and may pressure ports for rebates.

VALUATION/RECOMMENDATION

Maintain DCF target price of RM3.35. At implied 19x 2019F PE, 13x EV/EBITDA and 3.6% dividend yield, our target price is based on DCF valuation to 2054.

Maintain HOLD. Although we maintain that there is upside risk to our valuations and earnings forecasts, the risk-reward is still neutral at this juncture due to concerns over Malaysia’s economic growth and the global trade wars. A sustainable trend of transshipment volume growth will alleviate the risks. We have not priced in the long-term CT10-19 potential yet but advise to look towards 2H18 (where earnings are expected to be stronger) or when Westports updates its profit guidance, to support an earnings forecast and dividend yield upgrade. Entry price is RM3.10.

SHARE PRICE CATALYST

Sustainable, higher-than-expected volume growth. If a sustainable trend of transshipment volume growth is recorded along with commendable gateway volumes, this will prompt us to upgrade our earnings forecasts.

Source: UOB Kay Hian Research - 26 Jul 2018