Westports reported a 9% decline in container volume in April-May 2017, post the commencement of the new shipping alliance. The lower ad hoc calls and regional competition also affected inorganic container volume growth. The stronger gateway volume is a welcome respite, but is unlikely to offset the decline in transhipments. We trim our container volume assumption to -3% for FY17 and downgrade Westports to HOLD from Buy with a lower TP of RM3.95.

9% Yoy TEUs Decline in April-May 2017

Westports reported a 3% yoy decline in container volume to 3.95m TEUs for the five-month period from Jan-May 2017. Stripping out the 1% yoy uptick recorded in 1Q17, container volume fell a greater 9% yoy for the month of April and May 2017. The sharp decline in container volume surprised us as we had earlier anticipated moderate growth on higher ad hoc calls arising from the shipping alliance realignment.

Affected by Regional Competition and Shipping Alliance Realignment

Westports said lower container volume in 2Q17 was mostly due to lower ad hoc calls from Ocean Alliance and THE Alliance, as pricing competition by regional ports led to receding volume. Higher east-bound focused services also affected Westports, as the port would be handling backhaul services instead, i.e., return routes from West to East towards the tail end of 2Q17.

Higher Gateway Boxes to Improve Margin

On a positive note, Westports recorded firmer gateway volume growth in line with the strong growth in Malaysian exports. Management guided that gateway boxes registered a 3% yoy uptick in Jan-May 2017, indicating firmer 4-5% growth in April and May 2017 after stripping off 1Q growth of 2%. Gateway boxes are generally higher margin-yielding, and thus we should see some mild improvement in the gross profit margin, but this should still be unlikely to offset the decline in transhipment volume.

Expecting a Decline in Volume in FY17 Instead

All in all, we have trimmed our container volume growth assumption from 2% growth to a 3% decline for FY17. We also expect FY18 container volume to dip a further 4%, before rebounding to 3% growth in FY19. Our FY17 decline of 3% implies a further decline in 3Q and 4Q container volume, as the absence of ad hoc calls and the customer volume reduction would likely lead to yoy decline off the high base effect achieved in 2016. Our 12M DCF-based TP is lowered to RM3.95 from RM4.50. Downgrade to HOLD from Buy. Upside risk: better-than-expected recovery in global trade growth; downside risk: stronger competition from regional ports.

9% Decline in April and May

Based on the table above, we can deduce that Westports recorded a 3% yoy decline in container movements during the five-month period from January 2017 to May 2017. However, the numbers were partly masked by the slight uptick of 1% in 1Q 2017 figures. Stripping out the 1Q numbers for both FY16 and FY17, Westports’ actual volume for the two-month period (April-May) dipped a further 9% yoy. The lower volume came as a surprise to us, as we had earlier anticipated moderated container volume growth in 2Q on higher ad hoc shipping movements that could be expected when there is a change in shipping alliance. Recall that the new alliances commenced operations on 1 April 2017 for the expanded Ocean Alliance and THE Alliance.

Affected by Shipping Alliance Realignment and Regional Competition

In a subsequent conference call hosted by Mr Chang Kong Meng, Investor Relations, we understand that the underperformance in 2Q can be attributed to two intertwined factors:

(i) The realignment of the container routes leading to higher eastbound-focused services. Under the Ocean Alliance and THE Alliance service offerings, most of the 12 services that would be calling are more eastbound-services than westbound services. As the services would be calling Westports only on the backhaul segment of their voyage, i.e., from West back to East on the return route, Westports would only likely to handle some of the vessels’ container requirements beginning in the latter part of 2Q, when the vessels flow back from Europe to China. Hence, Westports may observe a container volume uptick in June before the close of 2Q, but we do not think it would be enough to move the needle to lift quarterly volume.

(ii) Intensifying regional competition. Westports was also affected by regional competition, specifically from Singapore. As widely reported, PSA of Singapore stood out to be the biggest winner from the latest shipping alliance realignment, as it sought to regain market share lost to Westports via JV arrangement with the latter’s long-time customers like CMA CGM and China Cosco. As a result, number of weekly calls at Westports from the Ocean Alliance fell from 14 to six. At the same time, Hapag-Lloyd is also gradually shifting UASC’s container out of Westports, as THE Alliance is consolidating their weekly calls to PSA, leaving only a single AsiaMiddle East route at Westports. While we had earlier anticipated for the gradual phasing in phasing out of container volume, the latest volume does indicate higher velocity of the container shifting out of Westports. Apart from that, the uptick in ad hoc calls also did not pan out, possibly due to higher incentives given by competing ports to lobby for inorganic container volume growth.

More Favourable Gateway Volume

On a positive note, Westports continued to benefit from the strong export growth in Malaysia. According to official data release, March exports rose 24% from a year earlier, up by double digits for the fourth-straight month. Correspondingly, this leads to favourable container volume mix with stronger growth momentum of higher yielding laden gateway boxes, while overall container terminal utilisation also moderated to a more comfortable range that would facilitate better service quality levels. Westports’ transhipment volume averaged 70% while gateway volume took up the remaining 30% for FY16. Generally, gateway volume commands higher terminal handling charges due to its captive nature. Any upside to the gateway mix would invariably result in firmer margin, which could buffer some of the loss in transhipment volume.

Source: Affin Hwang Research - 2 Jun 2017