Westports’ 1Q19 revenue came in at RM415m which translated into core earnings of RM139.9m, accounting for 24% of HLIB and 23% of consensus forecasts. Management has guided for 3%-8% container throughput growth for FY19, in line with our forecast of 5% YoY growth. Forecast unchanged. Maintain HOLD, with unchanged TP of RM3.79 based on DCFE (CoE: 8.0%).

Within expectations. 1Q19 revenue came in at RM415m (-0.7% QoQ, +7.8% YoY) which translated into core earnings of RM139.9m, accounting for 24% of HLIB and 23% of consensus forecasts. Trend wise, Westports typically achieves seasonally lower 1Q earnings (c.21%-24%) during the year due to Chinese New Year and lower number of working days in 1Q.

QoQ. Despite effective container tariff hike in Mar 2019, revenue declined by 0.7% (from RM418m) due to seasonal factor that mitigate the volume in container throughput (from 1.73m TEUs in 4Q18 to 1.71m TEUs in 1Q19). Core earnings declined by 2.3% in conjunction with weaker EBITDA margin, higher D&A and interest cost.

YoY. Revenue increased by 7.8% (from RM385.1m), mainly due to increase in growth in container throughput volume (+12%) and implementation of container tariff hike effective 1 March 2019. Transhipment container improved by 15% to 1.71m TEUs (from 1.48m TEUs) while gateway volume increased by 7% to 0.82m TEUs (from 0.77m TEUs). Core earnings increased by 12.9% (to RM139.9m) in tandem with higher revenue and improved margins. Cost of sales and fuel cost were flat with deviation -0.1% and +3% respectively.

MFRS16 impact towards 1QFY19. The overall impact of MFRS 16 (effective 1 Jan 2019) are lower rental revenue (-9.1% YoY, -9.1% QoQ), lower marine cost (RM1m in 1Q19 compared to RM7m in 1Q18) and slightly higher finance cost of incorporating small amount of interest expense on lease liabilities (+0.1% YoY). The reduced marine cost is now recognized as depreciation of the ROU assets at other expenses and interest expense on the lease liabilities at finance cost. Therefore, core earnings improved by 12.9% YoY due to MFRS 16 adjustments as compare to 15% YoY without MFRS 16 adjustments.

New liquid bulk jetty. Westports is building new liquid bulk jetty in 2H19 for a new client that will cost approximately RM70m capital expenditure contributing to higher conventional segment (accounting for 7.5% of current total revenue). The project is expected to complete in 2.5 years.

Assessment of impact from climate change. According to the IPCC Special Report on the impacts of global warming, Global Mean Sea Level (GMSL) is forecast to rise approximately 0.1m by 2100 in a 1.5°C to a 2°C warmer world. Based on the existing and future design, projected sea level increase at Peninsular Malaysia is not expected to adversely affect Westports’ operations and financials.

Outlook. Westports guided its container throughput to register a single-digit percentage growth rate of 3-8% in FY19, in line with our forecast of 5% YoY growth.

Forecast. Unchanged as results are in line. FY21 projections are also introduced.

Maintain HOLD, with unchanged TP of RM3.79 based on DCFE (CoE: 8.0%). While we like Westports for its earnings recovery prospects (driven by throughput recovery and tariff hike), we reckon that the stock is fairly valued at 22.0x and 19.6x of FY19-20 PE (5-year mean: 21.5x)

Source: Hong Leong Investment Bank Research - 29 Apr 2019