Highlights

• Westports is expected to have a marginally stronger container volume growth of +1% in FY18 which is an improvement from -9% in FY17. Container volume growth will remain weak in 1H18 due to changes in the global shipping alliances, but will pick up gradually in 2H18 in line with the expected pick up in global trade.
• Currently, the port has a utilisation rate of 65% at 9m TEUs per annum (mtpa) of current capacity 14mtpa. Management has guided a benchmark utilisation rate of 85% for the port to operate efficiently. Upon reaching utilisation rates of 75% consistently for 3 consecutive months which is roughly 200k TEU per week, management will add another 5 to 6 Quay Cranes for CT9 phase 1 (increase 1mtpa capacity) and consider CT9 phase 2 expansion (increase 2mtpa capacity). The cranes cost approximately RM45m each.
• In the long run, management has plans for CT10 to CT19 expansion (which has received an Approval–In-Principle from the Government), doubling the total capacity of the port to 30mtpa.
• An effective tax rate of 24% is to be expected in FY18 as opposed to 4% in FY17, as there will be no ITA drawdown.
• The ECRL project will not be affecting the port’s throughput volume due to cost efficiency reasons: i) Significantly smaller capacity of roughly 40 FEUs per train as opposed to 18,000 TEUs per ship; and ii) Higher unit cost of freight movement.

Risks

• Container trade volatility.
• Postponement of tariff hike.

Forecasts

• We adjust our FY 18 earnings downwards by 4% on the back of better guidance on operating expenses. Our FY19 and FY20 earnings decreased by 10% and 16% respectively as we impute for higher effective tax rate of 24% as opposed to 18% due to deferment of CAPEX and no ITA assumptions.

Rating

HOLD ↔

• 2017 was a year of consolidation for the group as the overall shipping alliances’ movement is unfavourable for the group on a net basis. We believe the group would return to its growth path in 2019 gradually as the gateway volume continues to grow while its transhipment volume would resume growth when the reshuffled shipping alliances grow.

Valuation

• We maintain our HOLD with a lower TP of RM3.60 (from RM 3.68) based on DCFE. We adjust our TP marginally lower by 2.17% mainly due to higher tax assumptions for FY19-20 on deferment of CAPEX.

Source: Hong Leong Investment Bank Research - 6 Mar 2018