We expect 2Q20 earnings to be worst due to the full brunt of the MCO, as data from May container volume has bottomed out by -24% YoY, much lower than April container volume, which saw a -17% drop YoY. Nonetheless, we expect a gradual recovery in 2H to reflect the global economy recovery, hence global trade, on the back of re-opening in most countries and recovery stimulus packages. Overall, Westports is expecting its annual container throughput growth to record a double digit decline (-10% to -20%) in FY20 before registering a positive growth in FY21. We maintain our forecast and reiterate our HOLD call with unchanged TP of RM3.66. Although we like Westports for its stable business model (during normal circumstances) as well as stable dividend payout ratio of 75%, the Covid-19 outbreak has raised a near term concern given the potential negative impact to volume.

Below Are the Key Takeaways From Our Recent Conference Call With Westports:

May volume is the worst. 2Q20 will see earnings contract sharply owing to the full brunt of the MCO. May container volume has bottomed out at -24% YoY, much lower than April container volume which saw a -17% drop YoY. This arises from the decline in domestic and global consumption due to Covid-19 and subsequently, lockdown in most countries. As for June volume, management shared that on current trajectory, the decline should be less severe YoY compared to May. Nonetheless, we expect a gradual recovery in 2H to reflect global economy recovery, hence global trade, on the back of re-opening in most countries and recovery stimulus packages. Overall, Westports is expecting its annual container throughput growth to record a double digit decline (-10% to -20%) in FY20, which may come in below 10m TEUs, before registering a positive growth in FY21.

New normal may dampen consumption. Consumer behaviour will possibly change due to Covid-19, which may curtail the restart of economy. The recently announced PENJANA plan may be positive for consumption; however, a meaningful recovery remains highly dependent on the strength of global and domestic demand revival. We anticipate cautious sentiment to persist and social distancing to remain in place, which could dampen consumption as we already seen in 1Q. The recent increase in unemployment data may also hurt consumption activities, thus affecting global trade. Overall, outlook for port industry remains cloudy in the near term stemming from the uncertainties of the economy from Covid-19. However, on the longer time horizon, Westports outlook remains upbeat underpinned by global trade in manufacturing sector.

Other updates. Dividend payout policy of 75% to remain the same for now. However, management is considering reducing its payout ratio to be prudent depending on economic situation and approval from shareholders. Westports 2 expansion will still continue as planned, although it may be delayed, as we understand the negotiations with government are taking slightly longer due to the pandemic.

Forecast. We maintain our forecast as we already imputed -10% declines in throughput growth for FY20 in our previous report, in line with management guidance.

Maintain HOLD, with unchanged TP of RM3.66 based on DCFE with assumption of CoE: 7.4%. Although we like Westports for its stable business model (during normal circumstances) as well as stable dividend payout ratio of 75%, the Covid-19 outbreak has raised a near term concern given the potential negative impact to volume.

Source: Hong Leong Investment Bank Research - 23 Jun 2020