Strong Volumes Drive Earnings Growth

Westports reported a good set of results – 9M19 core net profit grew by 21% yoy to RM466m on the back of higher container volumes (+16% yoy), driven by strong upticks in both the transhipment (+20%) and gateway (+8%) businesses. Management has raised its 2019 container growth guidance to 12-15%, from “high single digit”. Overall, the earnings were within consensus and our forecasts. We maintain our earnings forecasts, HOLD rating and DCF-derived price target of RM4.22. At 22x 2020E PER, Westports now trades near its 5-year average forward PER of 21x, which looks fair.

Strong Volumes Drive Profit; Earnings Were Within Expectations

Westports reported a good set of results – 9M19 core net profit grew by 21.4% yoy to RM465.7m on the back of higher revenue (+11.1% yoy) and stable operating costs. The strong 9M19 revenue growth was driven by: (i) higher transshipment volume of 5.39m TEUs (+20% yoy); (ii) stronger gateway volume (+8% to 2.65m TEUs); and (iii) tariff revision for gateway containers (+13%) in March 2019. The strong growth in container revenue (+15% yoy to RM1,147m) has more than offset a weaker contribution from the conventional cargo (-16% yoy to RM90m). Overall, the earnings were in line with both market and our expectations. Westports’ 9M19 core net profit accounts for 74% of street and 73% of our full-year profit forecasts.

3Q19 Earnings Were Marginally Lower Qoq Due to Higher Costs

Sequentially, Westports’ 3Q19 core net profit slipped by 4% qoq to RM159.3m due to higher costs (ie, manpower, depreciation). The group’s revenue inched up by 1.5% qoq on higher contributions from both the transhipment and gateway volumes.

Management Raised 2019 Volume Growth Guidance to 12-15%

The strong 9M19 container volume gains (+16% yoy to 8.04m TEUs) were attributable to several factors including: (i) higher port calls by Ocean Alliance (from the Port of Singapore); (ii) market-share gains (against Northport); (iii) gateway volume growth, partly attributable to the weakened Ringgit (notable growth in the paper and the polymer resin industries); and (iv) the low base effect in 9M18. Management has raised it 2019 volume growth guidance to 12-15%, from “high single digit” previously. Looking into 2020, management expects the container volume growth to normalise to the 3-8% level.

Target to Secure Concession for Westport 2 by Mid-2020

Westports has finalised the port extension layout for its expansion project (Westports 2). Under the expansion plan, management intends to build 8 new container terminals (CT10 to CT17) progressively and to double its container handling capacity to 28m TEUs (from 14m TEUs currently). Management targets to complete the detailed EIA studies and secure the concession by mid-2020.

Under Phase 1, Westports is allocating RM1bn capex for reclamation and dredging works for CT10 to CT13, to be completed within 2 years from the date of commencement. Management is exploring various funding options, including a dividend reinvestment plan and equity fundraising.

Maintain Earnings Forecasts, HOLD Rating and TP of RM4.22

We maintain our earnings forecasts, HOLD rating and DCF-derived target price of RM4.22. At a 22x 2020E PER, Westports is trading close to its 5- year average forward PER of 21x, which looks fair to us. Upside risks are strong, sustained growth in container volume and earnings; downside risks include an economic slowdown that drags container volume and an unexpected increase in operating costs.

Source: Affin Hwang Research - 6 Nov 2019