• Westports announced that over provision of RM17m for deferred tax liabilities had resulted in higher effective tax rate of 39% in its 1Q22 results and a rectification over this will be made in 2Q22.

• Holistically, management guided that effective tax rate projection of between 32%-34% for FY22 before settling back to the normal statutory tax rate from FY23 onwards.

• We estimate FY22 container throughput volume to drop c.3% YoY impacted by current global headwinds such as continued global supply chain disruption, geopolitical tensions and inflationary environment.

• We cut our earnings forecast by 15%/10% for FY22F/FY23F given this after imputing lower volume, lower margin and higher FY22 tax rate of 33%.

• Downgrade to a HOLD with lower TP of RM3.75, based on DDM (WACC: 6.8%, TG: 2%) which implies a FY23F PER of 18.5x.

Over provision of deferred tax liabilities by RM17m

The government's introduction of a one off 33% prosperity tax for tax assessment year 2022, has led to an oversight by Westports with regard to accounting treatment of certain temporary differences for deferred tax liabilities in its 1Q22 results. This resulted in taxes increasing to RM97m on over provision of RM17m thereby elevating effective tax rate to 39% instead of the blended effective tax rate of 32% supposedly to be realised. Management guided that the adjustment on over provision will be made in 2Q22 and a projected effective tax rate for FY22 is expected to be between 32% - 34%, which is slightly higher than our estimate of 31%.

Lower FY22 container throughput volume anticipated

Westports, 1Q22 throughput volume dropped by 10% YoY, as container volume especially transhipment was affected by supply chain challenges from China’s lockdowns and closure of some ports in the Far East. As to date, total throughput volume for April & May 2022 declined c.6-7% YoY. We are expecting the same trend to continue for June, which translates to a decline of about 6% YoY in 2Q22 mostly coming from the drop in transhipment volume due to the earlier mentioned reasons. As for the 2H22, we estimate almost a flattish growth YoY, despite the reopening of the economy and lower base volume in 2H21 (due to Westports worst port congestion and devastating floods in December). This is considering the impact of current global headwinds such as continued global supply chain disruption, geopolitical tensions and high inflation that may limit the recovery in Westports’ throughput volume. Overall, we now estimate FY22 total container throughput volume of 10.06m TEU, a drop of 3% YoY. For FY23, we estimate an increase c.5% YoY on the back of improving operating environment and stable global demand.

Downgrade to HOLD with lower TP of RM3.75

We cut down our earnings forecast for FY22F/FY23F by 15%/10% respectively after factoring in lower throughput volume forecast by 4-6% in FY22-23F and lower margin due to higher fuel costs. We also increased our effective tax rate to 33% from 31% in FY22 while maintaining 24% rate for FY23. Downgrade Westports to a HOLD with lower TP of RM3.75 (from RM4.50), based on DDM (WACC: 6.8% and lower TG: 2%). This implies 18.5x PER for FY23F and decent dividend yield of 3.5%/4.3% for FY22F/FY23F at current price.

Source: BIMB Securities Research - 11 Jul 2022