Results

• Within expectations – Reported core profit of RM140.9m for 1Q17 achieving 21.2% of HLIB forecast for FY16 and 21.4% of consensus.

Deviations

• None

Dividends

• None.

Highlights

• YoY: 1Q17 core net profit declined by 6.6% YoY due to higher effective tax rate (1Q17: 21.3% vs. 1Q16: 18.9%) on the back of CAPEX timing differences and higher fuel cost due to price hike. This is being partially offset by slightly higher revenue YoY driven by 1% overall throughput growth attributed to 1% transhipment volume growth and 2% gateway volume growth.
• QoQ: Core net profit plunged 16.8% mainly dragged by (i) significantly higher effective tax rate (1Q17: 21.3% vs. 4Q16: 11%) due to lower CAPEX spent in the quarter resulting in lower Investment Tax Allowance (ITA) and (ii) weaker QoQ throughput due to higher volume based created in 4Q16 amid earlier Chinese New Year festive season.
• Outlook: Real impact from restructuring of shipping alliances would take shape in 2H17. The company still has positive volume growth target for 1H17 (due to surge in volume from transitional containers i.e. adhoc volumes).
• In 2H17, gradual volume loss might be seen from Ocean Alliance of which CMA-CGM might shift some volume to Singapore. UASC, its 2nd biggest client, is targeting to complete its merger with Hapag Lloyd, which could result in lower volume for the group. Nevertheless, we are expecting a flattish or a slight growth of volume in 2017.

Risks

• Container trade volatility.
• Postponement of tariff hike.

Forecasts

• FY17/18/19 core earnings forecasts are cut by 2/5/3% to account for higher depreciation cost post adjusting for higher CAPEX assumption for FY17 and higher tax rate.

Rating

BUY ↔

• While near term headwinds are present, we believe Westports would ride through it resiliently through more buffer created by extra ITA generated through higher CAPEX. In the longer run, the company remains a solid company with long term growth expected to resume post completion of readjustment of shipping lines in the alliances.

Valuation

• We maintain our BUY call with lower TP of RM4.42 (previously RM4.71) based on DCFE valuation post adjustments in CAPEX and tax rate assumptions.

Source: Hong Leong Investment Bank Research - 28 Apr 2017