• Westports’ 4QFY18 net profit rose 2.3% qoq to RM145.5m contributed by higher throughput volume as well as lower overall operating cost

• FY18 net profit of RM533.5m fell 18.1% mainly due to tax rate normalization in the absence of investment tax allowance (ITA). Overall, in-line with our forecast at 97%

• We revised upwards our FY19 and FY20 earnings forecast by 4% and 6% respectively due to higher container throughput volume expected (+5% yoy)

• Upgrade to BUY with new TP of RM4.30 based on DDM valuation.

Strong qoq supported by higher throughput volume

Westports’ 4QFY18 revenue remain flat at RM418m supported by overall higher container and conventional volume of 5% and 11% respectively. Transhipment volume improved to 1.73m TEUs (+9%) mitigating a decline in gateway volume of 0.85m TEUs (-2%). The increase in transhipment was mainly due to Chinese New Year activities and front-loading activities ahead of US-China trade war negotiation outcome. Net profit rose to RM145.5m (+2.3% qoq) due to lower operating cost and lower finance cost from savings in commitment fee due to cancellation of Bank of China revolving credit facilities, as well as higher investment income. Hence, profit margin improved by 0.7ppts qoq to 34.8%.

Earnings declined on absence of ITA but within expectation

Westports’ 4QFY18 net profit declined by 31% yoy mainly due to higher effective tax in the absence of investment tax allowance (ITA). Its PBT however increased by 33% yoy supported by growth in container volume (+14%) especially coming from Intra-Asia (+16%) and Asia-Europe (+49%). Likewise, full-year FY18 PBT rose by 3.6% yoy to RM533.5m, which is inline with our and consensus FY18 estimate, making up 97% and 101% respectively.

Higher container throughput volume in FY18

Westports’ FY18 total container throughput volume grew 6% yoy, making up 102% of our full year forecast. This is mainly contributed from higher gateway volume of 3.30m TEUs (+17% yoy) mitigating a flat growth from transhipment volume. The strength in gateway was supported by i) return customers from Northport to Westports and ii) increase import in plastic waste.

Dividend payout of 75%.

Westports declared a second interim dividend of 6.33sen per share totalling 11.73sen for FY18, translating into a yield of 3.2%. We expect a higher DPS of 13.6 for FY19 with an estimated payout of 75%.

2019 CAPEX for maintenance

Management indicated that CAPEX for 2019 would be for maintenance purposes only. Apart from this, there is currently a plan to build a LNG berth at the far end of CT9 for a customer. The project is still under negotiation and should this materialised, the cost estimated for building the berth is projected to be in the region of RM40m-60m.

Positive developments moderating challenging outlook

Westports have navigated its course well despite several tough challenges, particularly the substantial loss of transhipment volume in 2017. The still unresolved US-China trade war and anticipated global economic slowdown cast an ominous cloud over the international container business that may hamper Westports’s growth performance. Nevertheless, we see several potential tailwinds for Westports to strive ahead as follow:-

i) Westports have shown ability to transition towards a new baseline, resulting in an improved transshipment volume by 15% since 2HFY18 following 5 consecutive decline despite ongoing US-China trade conflict.

ii) Stabilization of existing global shipping arrangements and developing new ones enabled Westports to generate greater throughput volume.

iii) Active Malaysian’s government participation and support together with Westport in engaging international shipping alliances such as COSCO/Ocean Alliance to establish a transhipment hub at Port Klang.

iv) It was reported that Ocean Alliance is introducing 3 new services at Westports for which the impact can only be observed from May FY19 onwards

v) Tariff increase (c.+15%) which is expected to be implemented in March FY19 expected to boost Westports earnings from local cargo segment.

Earning forecast revision

We revised upwards our earnings forecast for FY19 and FY20 to RM616m (+4%) and RM662m (+6%) respectively. This is on the back of positive developments going forward and higher expected container volume especially from transhipment. We now assume overall container volume to improve to 10m TEUs (5% yoy), which is within 3- 8% growth range guided by the management.

Upgrade to BUY with new TP of RM4.30

We upgrade to BUY call with new TP of RM4.30 based on DDM valuation (Ke:8.8%, TG:5.5%). Our TP implies a FY19E PER of 23.8x, which is justified given a stronger earnings driven by throughput recovery outlook, plus expansion in profit margin. We continue to like its stable business and steady dividend payment stream (75% payout) that consistently rewards long-term shareholders.

Source: BIMB Securities Research - 31 Jan 2019