• 9M23 core net profit of RM568m was in-line at 75% of our full-year forecast (80% of Bloomberg consensus); 3Q23 core net profit was flattish qoq.

• Reiterate Hold with unchanged DCF-based TP of RM3.57. Westports said it will most likely be able to sign the new concession agreement in Dec 2023.

• Our views on the stock will be shaped by whether the concession terms will adequately compensate Westports for the high capex cost of the W2 project.

A Flattish 3Q23 Against 2Q23, But Core Net Profit Up 29% Yoy

3Q23 core net profit of RM194m was virtually flat against the immediately-preceding 2Q. While container volumes rose 2.6% qoq, average container unit revenue fell 1.2% qoq due to reduced value-added services (VAS) revenues; the latter was probably caused by fewer reefer boxes stored at the yard due to reduced long-haul trade volumes to Europe, in our view. Consequently, total container revenues eked out a small 1.3% gain qoq, and Westports did not deliver any qoq growth at the EBIT line in 3Q23 after deducting for higher fuel prices against the 2Q23. On a yoy basis, 3Q23 EBIT rose 10.8% due to 6.8% growth in container volumes (partially offset by a 2.8% yoy drop in average container unit revenue) and a yoy fall in fuel prices (although electricity tariffs rose yoy). 3Q23 core net profit rose 29% yoy due to a 9.8% pts drop in the effective tax rate to 22.5%, as Westports was subject to ‘Cukai Makmur’ last year.

Gateway Container Volume Growth Remains Impressive…

Westports’ underlying container volume growth of 7.2% yoy during 9M23 was better than the 0-5% yoy growth guidance that management provided at the start of this year. Despite the challenges faced by the global economy this year, which had impacted trade growth across many countries, Westports’ 9M23 gateway cargoes grew by an impressive 11.9% yoy, mainly due to the establishment of new Chinese factories in Malaysia, as China’s companies diversify their sources of production into ASEAN countries to hedge against geopolitical tension with the US and/or Europe. For several years now, Malaysia’s Klang Valley has seen the rise of new wastepaper recycling plants (with wastepaper imported from developed countries and the new paper/cardboard products exported to other parts of Asia), and new glass and solar power panel factories. These new factories drove up the volume of gateway cargoes in Westports. Conversely, Westports’ transhipment volumes in 9M23 only grew 4.2% yoy, as the European economy was weak.

…but Share Price Direction Will be Determined by W2 Concession

Westports is now working hard to finalise its new concession agreement (as the current one ends in Aug 2024F), which will also determine how Westports will be remunerated for its ‘Westports 2’ (W2) project that will add 13m teus of annual capacity to its existing 14m teus. Westports said at its analyst briefing that it hopes to be able to brief the market on the new concession before this year’s Christmas. Upside risks include terms that are perceived by the market as being adequate for Westports to achieve a positive IRR on W2. Downside risks include uncertain timeline of tariff hikes that are needed for W2 to be viable.

Source: CGS-CIMB Research - 9 Nov 2023