• Westports’ earnings declined by 18.1% yoy mainly due to tax rate normalization, in absence of investment tax allowance (ITA).

• Its total container throughput is flattish for both yoy and qoq. The decline in transhipment volume is offset by exponential growth in gateway volume.

• Positive outlook due to following reasons: 1) Limited concern on trade war 2) Scheduled tariff revision remains intact

• Maintain BUY with slightly revised TP of RM3.90 (from RM4.00) to reflect tax rate normalization and rollover of our DDM valuation to FY19.

Earnings declined due to tax rate normalization

Westports posted a decline in 2Q18 earnings of 18.1% yoy due to tax rate normalization, in absence of ITA. To recap, in 2016, Westport was granted an extension on tax incentive of its qualifying capital expenditure for three years commencing from 2015. This is also applicable on its newly completed CT8 and CT9 in 2017. As the extension has elapsed, its tax rate has normalized to 24%.

Flattish container throughput volume

Its total container throughput volume is flattish for both yoy and qoq. According to management, the decline in transhipment volume is attributed to seasonal factor. Meanwhile, the exponential growth in gateway volume is underpinned by incoming volume which came from its rival, Northport, and better local activity volume. We expect its gateway volume growth would be moderate in 2H2018. Hence, we expect its total throughput volume would derive from organic growth moving forward.

Positive outlook remains intact

Although the trade war between China and USA has become a possbility, we reckon that Westport has limited risk on this development as it only has 8.9% in Asia-America throughput volume. Separately, its scheduled tariff revision remains intact for September 2018 with tariff at c.13% higher for gateway volume while tariff for transhipment volume is expected to be sticky.

Maintain Buy with revised TP of RM3.90

We maintain our BUY call with a revised TP of RM3.90 (from RM4.00) to reflect its tax rate normalization to 24% (Table 3) and rollover our DDM valuation to FY19. We continue to like its stable business and steady dividend stream as rewards to its shareholders.

Source: BIMB Securities Research - 26 Jul 2018