Westports’ 1Q18 results were below market and our expectations. Net profit declined 12% yoy to RM123.8m in 1Q18 on the back of lower revenue and a higher tax rate. Container throughput fell 7% yoy due to the impact from the realignment of shipping alliances and industry consolidation, which led to some transhipment cargo shifting from Westports to Singapore since 3Q17. We expect a better 2H18 performance as throughput growth turns positive yoy. We reiterate our BUY call with a DCF-based 12-month TP of RM4.10.

Below Expectations

Westports’ 1Q18 net profit of RM123.8m (-12% yoy) comprised 22% of consensus and our previous full-year forecasts of RM557-575m. We were surprised by the higher-than-expected tax rate. We are cutting our EPS forecasts by 5% in FY18-20E to reflect a higher tax rate of 24% (similar to 1Q18) vs our previous assumption of 20%. Revenue declined 26% yoy to RM385m in 1Q18 mainly due to the absence of construction revenue for CT8-9 expansion and the adoption of MFRS 15, ie, recognising revenue based on net tariffs (excluding rebates). We gather that revenue declined 1% yoy excluding the impact of MFRS 15 and construction revenue.

Better Profit Margin

EBITDA only declined 2% yoy in 1Q18 as the cost of sales fell by a sharper 44%, partly due to the MFRS 15 impact. The EBITDA margin improved to 60.9% in 1Q18 from 54.5% in 1Q17, which reflects the normalised margin going forward due to MFRS 15 and no further distortions from construction revenue. PBT fell 9% yoy in 1Q18 due to higher interest expense.

Container Throughput Recovery

Container throughput fell 7% yoy to 2.25m TEU in 1Q18. Transhipment cargo declined 18% yoy to 1.48m TEU while gateway cargo jumped 25% yoy to 0.77m TEU. The impact of transhipment cargo movements from shipping alliances continues to be felt while gateway cargo is growing due to rising import/export activities as congestion has eased.

BUY on Better 2H18 Performance

The share price could see further consolidation in the medium term due to concerns over a potential US-China trade war and Westports’ expected weak performance in 1H18. But we expect a better 2H18 performance on expectations of a cargo throughput recovery and tariff hike of about 14% for gateway cargo in September 2018. Key downside risks include (i) a trade war affecting demand for shipping traffic and (ii) higher fuel costs.

Source: Affin Hwang Research - 26 Apr 2018