Westports’ 1H19 core earnings of RM305.6m (24.8% YoY) were above ours and consensus forecast at 52% and 50% respectively. Westports’s improved performance was driven by: (i) lower base in 2Q18; (ii) stronger exports number; (iii) increase on Intra-Asia and Asia-Europe trade-lane growth; and (iv) full quarter contribution of tariff hike. We increase our earnings by 7%, 5% and 4% for FY19-21 respectively as we reckon that Westports will do better in 2H19. Maintain HOLD, with a higher TP of RM3.90 based on DCFE (WACC: 8.0%).

Above expectations. Westports reported 2Q19 core PATMI of RM165.7m (+18.5% QoQ, +37.1% YoY), which brings the 1H19 core PATMI to RM305.6m (+24.8% YoY). This formed 52% of our full year forecast and 50% of consensus. We deem this to be above expectations (expecting stronger 2H) due to higher-than-expected container throughput volume of 5.3m TUEs handled in 1H19 and implementation of tariff hike since Mar 2019.

Dividend. Declared interim dividend of 6.74 sen (ex-date: 14 Aug 19, payment date: 23 Aug 2019).

QoQ. Revenue rose by 9.4% to RM454m (from RM415m), contributing to the rise in core earnings by 18.5% to RM165.7m (from RM139.9m), mainly due to the increase in container throughput volume by 8% to 2.74m TEUs (from 2.53m TEUs) and a full quarter’s contribution in 2Q19 from the 13% increase in tariff hike (effective 1 Mar 2019).

YoY. Revenue increased by 15.2% to RM454m (from RM394m), contributing to the improvement in core earnings by 37.1% to RM165.7m (from RM120.9m), mainly driven by the tariff increase, higher container volume in transhipment segment (+28%) and a higher volume in gateway segment (+11%). The improved performance in transhipment segment was due to the lower base witnessed in 2Q18 (resulting from relocation of volume to Port of Singapore) while gateway was driven by stronger exports (import: export at 49.5%: 50.5%)

YTD. Revenue rose by 11.5% to RM869m (from RM779.1m) primarily by the tariff increase and from the improved performance in container volume transhipment segment (+21%) and gateway (+9%). There was improvements on Intra-Asia trade lane growth (+20%) and Asia-Europe trade-lane growth (+40%) following from the normalisation of the realignment of shipping alliance, but was partially offset by a decrease in Asia-America trade-lane (-31%) due to service changes which we believe was affected by the on-going US-China trade war. Although container volume increased by 17% YoY, cost of container only increased by 10% YoY, suggesting a better efficiency of utilisation. Conventional cargo revenue decreased by 16.7%, reflecting lower dry and break bulk volume (-11% YoY). Rental revenue declined by 9.1% with MFRS16 adjustment. Core earnings improved by 24.8% to RM305.6m (from RM244.8m) as higher revenue gained from the full quarter contribution of tariff hike and unchanged operational cost.

Westports expansion. The port is currently operating at c.75% utilisation rate, which trigger for further additional 1m TEUs expansion at CT9 with estimated capex of RM400m-RM500m that will take about 1.5 years to develop (commenced on 3Q19). Westports 2 expansion is now being reduced to CT10-CT17 (from CT10-CT19) with estimated capex of RM10bn. Feasibility study on the Westports 2 expansion is still being carried out and is expected to complete within 3Q19.

Outlook. Westports guided its container volume growth of high single-digit percentage rate in 2019 (from 3-8% growth previously). We increase our container volume growth for 2019 to 6% (from 5%) as we take into account higher throughput volume handled in 2H19 as compared to 1H19. Historically Westports had higher 2H volume driven by the festive season such as Christmas, New Year and frontloading activity before Chinese New Year.

Forecast. We increase our earnings by 7%, 5% and 4% for FY19-21 respectively to take into account higher throughput volume growth as we reckon that Westports will do better in 2H19. Note that we also factor capex for additional 1m TEU expansion.

Maintain HOLD, with a higher TP of RM3.90 based on DCFE (WACC: 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 21.1x and 19.3x of FY19-20 PE (5-year mean: 21.3x).

Source: Hong Leong Investment Bank Research - 29 July 2019