Westport’s 1QFY18 core earnings of RM98m (-18% QoQ, -30% YoY) were below ours and consensus forecast at 17%. The decline was mainly due to higher operational cost and a lower container throughput volume. Port expansion is only expected to take place in 2021 based on our throughput growth assumptions. We expect throughput volumes to have a gradual rebound in 2H18 in line with the expected pick up in global trade. We maintain HOLD with lower DCFE based TP of RM3.30 (from RM3.60) as we cut earnings forecast by FY18: -11%, FY19: -12% and FY20: -10% to reflect shrinking margins from increased operational cost.

Below expectations. 1QFY18 revenue came in at RM385m which translated into core earnings of RM98.3m, accounting for 17% of HLIB and consensus forecast. The lower than expected results was mainly due to higher than expected operational cost and a lower than expected container throughput volume.

YoY. Revenue declined by 12% (to RM385.1m), mainly due to the adoption of MFRS15 and a decline in container throughput volume of 7% (higher gateway volume of +25% was insufficient to offset lower transhipment volume of -18%) arising from the realignment of alliances. Core earnings declined by 30% (to RM163.6m), due to higher depreciation (+21% from completion of CT9 expansion), finance cost (+22% as total borrowings increased by 25%), lower container throughput volume and higher effective tax rate (29% vs 21%).

QoQ. Revenue declined by 11%, mainly due to the adoption of MFRS15 and a decline in container throughput volume. Core earnings declined by 18%, mainly due to higher effective tax rate (29% vs 17%).

Port expansion. The port is still operating at c.65%-70% utilisation rate which is well below the 75% utilisation rate to trigger further expansion (i.e. crane installations). Based on our throughput growth assumptions, this will only trigger in 2021. Management is still discussing the feasibility of carrying out the CT13-19 expansion.

Tariff hike. The 15% hike in tariff container revision will be effective in 1 Sept 2018. This will bring about an immediate impact on Gateway throughput but have no impact on Transhipment (comprises of c. 35% and 65% of Container throughput volumes respectively).

Outlook. For FY18, we believe overall throughput growth would be close to nil as transhipment throughput growth would be negative due to full year impact of shipping alliance realignment, being offset by growth in gateway volume. 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.

Forecast. We cut earnings forecast by FY18: -11%, FY19: -12% and FY20: -10% to reflect the shrinking margins caused by increased operational cost (manpower, fuel etc.), depreciation and interest expense.

Maintain HOLD, lower TP to RM3.30 (from RM3.60) based on DCFE (WACC: 8.0%), following our earnings cut.

Source: Hong Leong Investment Bank Research - 26 Apr 2018