We upgrade Westports to BUY from Hold with lifted DCF-based TP of RM4.10. Westport’s 2017 result was a positive surprise mainly due to lower-than-expected taxation. PBT was within expectations, declining 10% yoy to RM677m in FY17. We believe transhipment volume bottomed in 3Q17 and is on the path of recovery (+3.7% qoq in 4Q17). The adverse impact of changes in shipping alliances and consolidation on Westports’ transhipment volume will still be felt in 1H18 but we expect a rebound in 2H18, riding on stronger global economic growth.

Lower PBT in 2017

Revenue increased 3% yoy to RM2.09bn mainly driven on construction revenue recognised for its CT8 and CT9 expansion (+62% yoy). Operational revenue from port operations declined 5% yoy to RM1.72bn. Higher operating costs (+9% yoy) and depreciation (+13% yoy) led to a 8% yoy decline in EBIT. Higher net interest expense (+6% yoy) due to the RM550m addition Islamic bond issuance to finance the port expansion contributed to the 10% yoy fall in PBT.

Earnings Above Expectations Due to Lower Tax

Net profit increased 2% yoy to RM652m due to lower taxation (-78% yoy) in 2017. Earnings was 7% above consensus forecast of RM609m and 13% above our estimate of RM577m. The low effective tax rate of 3.7% in 2017 was due to investment tax allowance for capital expenditure incurred for port development works.

Growing Gateway Volume

Total container throughput fell 9% yoy to 9m TEUs in 2017. The 16% yoy decline in transhipment containers was partially offset by the 10% yoy increase in gateway containers. The higher gateway (higher effective tariff compared to transhipment) share of total throughput at 31% in 2017 compared to 26% in 2016 improved yield, moderating the revenue decline to just 3% yoy in 2017.

Upgrade to BUY

We lift our EPS forecasts by 3-6% in FY18-19E to reflect higher revenue and lower operating costs given the expected rebound in throughput and cost control measures implemented. We lift our DCF-based TP to RM4.10 from RM3.95 after rolling forward our base year to FY18E. We upgrade our call on Westports to BUY from Hold. Key downside risks include (i) lower exports resulting in lower gateway volume and (ii) higher fuel costs.

Source: Affin Hwang Research - 9 Feb 2018