Westports reported 3Q19 core PATMI of RM154.1m (-7.3% QoQ, +10.8% YoY), which brings the 9M19 sum to RM460.3m (+19.9% YoY). The result was within ours and consensus forecast at 73.2% and 72.8% respectively. The improved 9M19 performance was due to higher container volume in transhipment and gateway segments and higher revenue following the tariff increase. CT9 expansion by 1m TEUs to 15m TEUs capacity would complete by end 2020. Studies on CT10-CT17 expansion have resulted in a favourable review and management is currently progressing on terminal design. Maintain HOLD, with a higher TP of RM4.38 (from RM3.90) based on DCFE with assumption of CoE: 7.4% as we take this opportunity to reduce the assumption of market risk free rate following the OPR cut by Bank Negara.

Within expectations. Westports reported 3Q19 core PATMI of RM154.1m (-7.3% QoQ, +10.8% YoY), which brings the 9M19 sum to RM460.3m (+19.9% YoY). This formed 73.2% of our full year forecast and 72.8% of consensus. We deem this to be within expectation because typically Westports achieves seasonally higher 4Q earnings. No dividends were declared.

QoQ. Top-line growth was a tad up by 1.3% due a slight increase in container and conventional volume by 1.5% and 3.9% respectively. However, EBITDA slightly decreased by 1.8% due to higher administrative expenses (+12%) and other expenses (+12%), dragged down core PATMI by 7.3%.

YoY. Revenue climbed by 10.2% attributable to higher container volume and implementation of container tariff hike effective 1 March 2019. Transhipment container improved by 17.1% to 1.85m TEUs (from 1.58m TEUs) while gateway volume increased by 5.7% to 0.92m TEUs (from 0.87m TEUs). Subsequently, core PATMI increased by 10.8% in tandem with higher revenue.

YTD. Revenue rose by 11.1% primarily due to the tariff increase and the improved performance in container volume transhipment segment (+19.8%) and gateway (+8.2%) and container tariff hike effective 1 March 2019. There were improvements on Intra-Asia trade-lane growth (+19%) and Asia-Europe trade-lane growth (+38%) following from the normalisation of the realignment of shipping alliance, but partially offset by a decrease in Asia-America trade-lane (-29%) due to service changes, which we believe is being affected by the on-going US-China trade war. Despite overall container volume increased by 15.7% YoY, cost of container only increased by 6% YoY, suggesting a better efficiency of utilisation. Sequentially, core PATMI improved by 19.9%.

Investment at CT9. Westports has placed additional investment at CT9 to raise another 1m TEUs capacity to 15m TEUs, which included additional equipment of 5 new quay cranes, 12 new units rubber-tyred gantry crane (RTGC), 40 terminal trucks and CT9 container yard zone Z (See Figure #2). The enhanced container terminal handling capacity is scheduled to be operational by end FY20 to support further organic growth before CT10 onwards becomes operational by FY23. The capex will be about RM500m for this additional 1m TEUs expansion. Meanwhile, Westports’s existing 100-acre land has been earmarked for logistics companies to build their warehouses to capitalise on Westports location, facilities, connectivity and ease in/outside the terminal.

Westports 2. Westports has obtained Approval-in-Principle for the proposed expansion (CT10 to CT17) to increase container handling capacity to 28m TEUs (current capacity of 14m TEUs) with an additional 4.8km of wharves. It has completed technical studies with favourable findings and approval from port authority including preliminary EIA and had finalised port extension layout (See Figure #3). Westports now is progressing towards operation design of terminal and in engagement with authorities. The management has mentioned about possibility of fund raising exercise to fund the first phase of expansion (CT10-CT13) and following phases to be funded by sukuk and dividend reinvestment plan.

Outlook. Westports guided its container volume growth of double digit percentage rate (12%-15%) in 2019 over 2018’s volume (from high single-digit percentage rate in 2019 previously). As a result, we are expecting sequentially higher 4Q19 volume driven by the festive season such as Christmas, New Year and frontloading activity before Chinese New Year.

Forecast. We reduced our capex for FY19 and channelled it to FY20 as management guided that additional 1m TEUs expansion on CT9 would only commence by the end of FY20. FY19 earnings remained unchanged, but FY20-21 earnings decreased by 1.3% and 0.9% respectively (on higher depreciation).

Maintain HOLD, with a higher TP of RM4.38 (from RM3.90) based on DCFE with assumption of CoE: 7.4% as we take this opportunity to reduce the assumption of market risk free rate (from 4.1% to 3.6%) following the OPR cut by Bank Negara. 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 23.6x and 21.8x of FY19-20 PE (5-year mean: 21.3x).

Source: Hong Leong Investment Bank Research - 6 Nov 2019