Westports reported a decent set of results – 2019 core net profit grew by 20% yoy to RM645m on higher revenue (+10% yoy) and stable operating cost; inline with the consensus and our forecasts. Looking ahead, management is cautious on the immediate business outlook due to the coronavirus outbreak that is affecting the regional shipping and port industries and weaken the business / consumers’ consumption. Taking a cue from management cautious guidance, we have lowered our 2020 container volume growth forecasts and cut our 2020-21E EPS by 3-6%. In tandem, we have trimmed our DCF-derived price target to RM4.10 (from RM4.22). Maintain HOLD.

Higher 2019 Earnings on Strong Volumes Growth; Within Expectations

Westports reported a decent set of results – 2019 core net profit grew by 20.4% yoy to RM644.9m on the back of higher revenue (+10.4% yoy) and stable operating costs. The strong 2019 revenue growth was driven by: (i) higher transhipment volume of 7.23m TEUs (+16% yoy); (ii) stronger gateway volume (+10% to 3.63m TEUs); and (iii) tariff revision for gateway containers in March 2019. Overall, Westports’ core earnings were within market and our expectations.

A Vessel Berthing Incident in 4Q19 Affected Headline Net Profit

Westports booked in a RM54m write-off of property, plant and equipment / concession assets due to a vessel berthing incident in 4Q19. As a result, the group’s reported net profit grew by a lower 11% yoy to RM590.9m. Management expects to recover these expenses via insurance claims in 2020. The board has maintained a 75% payout ratio and declared 13.0 sen of dividend for 2019 (+11% yoy).

The Coronavirus Outbreak Is Affecting the Regional Port Industry

Looking ahead, management is cautious on the 2020 business outlook due to the coronavirus outbreak that has resulted in a lockdown of Chinese cities and disrupted the Chinese logistics, regional shipping and port industries. Also, the coronavirus outbreak may weaken regional consumption (consumer / industry), thereby lowering container volume. In view of these uncertainties, management sees downside risks to their “low single digit” volume growth projection for 2020. Elsewhere, management guided that the signing of a concession agreement for Westports’ expansion plan may only materialise in 4Q2020 (from mid-2020).

Westports Proposes to Acquire 362-acre of Land for Expansion

Westports has entered into a conditional S&P Agreement with its major shareholder Pembinaan Redzai to acquire 361.8 acres of land (“Marina Land”) for a total cash consideration of RM394m. The land is adjacent to Westports’ existing facilities and the 381 acres of “land below the sea” that Westports acquired from PKNS Land in 2018. We are neutral on the acquisition: (i) the acquisition price of RM25 psf is inline with the fair value appraised by an independent valuer, PPC International; (ii) the land will form part of Westports’ expansion plan; and (iii) the conditions precedent include conversion of the category of land use and signing of concession agreement with the Government for the expansion of container terminal facilities.

Cutting Earnings Forecasts by 3-6%, Maintain HOLD

Taking cue from management’s cautious guidance, we have lowered our 2020 container volume growth forecast to 0% (from 4%). After incorporating our new volume projections and Westports’ 2019 full year financial statement, we have cut our 2020-21E EPS forecasts by 3-6%. In tandem, we have lowered our DCF-derived target price of RM4.10 (from RM4.22). Maintain HOLD. At a 21x 2020E PER, Westports is trading at 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 prolonged business disruption from the coronavirus outbreak or an economic slowdown that drags container volume and affect its profitability.

Source: Affin Hwang Research - 10 Feb 2020