Westports’ 1H20 core PATMI to RM309.5m (+1.1% YoY) were above ours and consensus forecast. The slight out-performance was driven by higher-than expected gateway throughput volumes handled in 1H20. We increase our earnings by 15% for FY20-22 as we reckon that Westports will do better in 2H20. Upgrade to BUY, with a higher of TP of RM3.98 (from RM3.66). With the worst likely over, we reckon that Westports is poised to ride on the global trade recovery inline with the reopening of economies.

Above expectations. Westports reported 2Q20 core PATMI of RM141.1m (-16.2% QoQ, -15.2% YoY), which brings 1H20 core PATMI to RM309.5m (+1.1% YoY). This formed 59% of our full year forecast and 55% of consensus. We deem this to be above expectations (expecting stronger 2H) due to higher-than-expected gateway throughput volumes handled in 1H20. During the quarter, we added back a net +RM6.8m (write-off of PPEs) from Westports’s reported net profit of RM134.3m.

Dividend. Declared interim dividend of 5.05 sen (1H19: 6.74 sen) ex-date: 11 Aug.

QoQ/YoY. Revenue declined to RM405m (-11.4% QoQ, -10.8% YoY), contributing to the decrease in core earnings to RM141.1m (-16.2% QoQ, -15.2% YoY), mainly due to the fall in container throughput volumes to 2.28m TEUs (-9.5% QoQ, -16.8% YoY) and fall in conventional volumes to 2.14mt (-22.2% QoQ, -8.2% YoY).

YTD. Top line fell slightly by 0.8% to RM862.0m (from RM869.0m) primarily by the reduction in transhipment volume (-14.1%); however, it was offset by the tariff hike and slight increase in gateway volumes (+1.7%). Operational cost remained flat as (i) there was an increase in manpower cost (+12.0%) arising from higher headcount and salary increment, (ii) an increase in electricity cost (+22%) from the eliminated electricity arrears with up-to-date cost, (iii) however, it was offset by decrease in fuel cost (-29.0%) due to lower usage and lower fuel prices. Combined with lower finance cost (-21.5%), core PATMI was a tad higher by 1.1%.

Other updates. Westports will temporarily adopt a dividend payout ratio of 60% (from 75%) to conserve cash as it expects the land reclamation for the Westports 2 expansion to commence in 2021. Detailed EIA study on Westports 2 is 90% complete and should be ready by mid-August.

Outlook. While we note that global consumption activity remains uncertain amid worsening Covid-19 count worldwide, as well as re-escalation of souring US-China relations, we believe the worst is over for Westports and volume should recover gradually in 2H20 as global economy has started to reopen. Management has now guided that it is possible for Westports to have high single digit negative growth as compared to previous guidance of -10% to-20% decline in throughput volume. This is stemming from Jun’s and July’s (first 3 weeks) numbers that showed a stronger-than expected rebound.

Forecast. We increase our earnings by 15% for FY20-22 following a stronger-than expected result.

Upgrade to BUY, with a higher of TP of RM3.98 (from RM3.66) based on DCFE with assumption of CoE: 7.4%. With the worst likely over, we reckon that Westports is poised to ride on the global trade recovery inline with the reopening of economies.

Source: Hong Leong Investment Bank Research - 27 Jul 2020