Westports’ gateway volume remains the brightspot as earnings hit an expected lull with lower transhipment throughput and higher overheads. However, we believe Westports has seen the worst and is poised to for an earnings recovery through sustained container throughout growth come 2H18. We reiterate our BUY call with a DCFbased 12-month TP of RM4.10.

Within Expectations

Westports’ 2Q18 revenue of RM394m was 21% lower yoy, primarily due to the adoption of MFRS 15 as container volume saw flattish growth of 1%. Container volume’s muted impact arose from gateway volume (+16%) balancing transhipment volume contraction (-6%). Adjusting for MFRS 15 which recognises revenue based on net tariffs (excluding rebates), operating revenue grew 2% YoY. Westports’ 1H18 net profit of RM123.8m (-12% yoy) comprised 45% of consensus and our full-year forecasts.

Overhead Expenses Dilute Better Operational Mix

Excluding MFRS 15, EBITDA margins marginally improved off the back of better mix, skewed towards gateway cargo and value added services. However, higher depreciation tied to CT-9 terminal completion in Dec 2017 and subsequent drawdown for financing resulted in lower PBT earnings yoy for the quarter (-7%). A higher effective tax rate further eased core net earnings to RM121m (-16% yoy).

Expect a Better 2H18

We expect a recovery in container throughput and a gateway tariff hike revision by 14% in Sep 18 to shore up earnings heading into 2H18. Organic growth will normalise in 3Q18 after Westports’ lost transhipment cargo to Singapore in Apr 2017. Recall, throughput was shifted to enable CMA CGM to meet its NOL/APL acquisition terms. Meanwhile, we believe Westports is well insulated from an immediate direct overspill of a trade war as the utilised Asia-Transpacific trade lane falls beyond Westports.

Maintain BUY With Unchanged DCF-derived TP of RM4.10

We maintain our forecasts as results have fallen within expectations. Maintain our BUY recommendation and DCF-based TP of RM4.10. While there may be lingering concerns over global trade, we believe Westports has just weathered the worst. Aside from being poised for an earnings recovery, Westports 2 potentially catalyses valuations further, once results of its feasibility study emerges in late 2018. Key downside risks include (i) lower exports resulting in lower gateway volume and (ii) higher fuel costs.

Source: Affin Hwang Research - 26 Jul 2018