• Strong 3Q20 core net profit of RM204m, driven by record operating revenue and lower fuel. 9M20 core net profit of RM498m (+7% yoy) was above market and our expectations.
• The strong 3Q20 revenue was driven by recoveries across all segments While some recoveries (eg. gateway volume, conventional cargoes) should sustain, others (eg. transhipment of empties containers, storage fees) may taper off in 4Q20.
• We lifted our 2020-22E EPS forecasts by 7-8% and raised Westports’ price target to RM4.15. Maintain HOLD.

Record operating revenue lifts 3Q20 core net profit to RM204m (+28% yoy)

Westports reported a strong set of earnings - 3Q20 operating revenue of RM501m was its highest quarterly revenue since listing in 2013, driven by a rebound in containers and cargoes throughput, as well as higher revenue from value added services (ie. reefer charges and storage fees). The higher operating revenue (+9% yoy) and lower fuel costs (due to the decline in fuel prices) led to a strong 3Q20 core net profit of RM204m (+28% yoy / +44% qoq), its second highest since listing.

9M20 core net profit beats street and our expectations

Cumulatively, Westports’ 9M20 core net profit grew by 6.9% yoy to RM498m driven by higher operating revenue and lower fuel, repair and maintenance costs. The group’s 9M20 operating revenue grew by 2.6% yoy to RM1.36bn (excluding construction revenue), driven by a higher gateway volume (+5% yoy), higher conventional cargoes (+8% yoy) and an increase in value added services that more than offset an 8% decline in transhipment volume. Overall, the results were above the market and our expectations, with 9M20 core net profit accounting for 82-83% of our respective full-year forecasts. The earnings beat was due to a strong gateway volume, higher-than-expected value added sales and a high transhipment volume for empty containers.

3Q20 container volume was a record high

Westports handled 2.93m TEUs of containers in 3Q20 (+5.8% yoy / +28.5% qoq), a record high, driven by a strong rebound after the Covid-19-induced slowdown. The recovery in transhipment reflected some repositioning of empty containers to China while growth in the gateway volume was more broad-based, with notable growth in paper, rubber products and fertiliser cargoes. In 3Q20, Westports booked higher storage revenue as customers collected their cargoes after the lockdown in 2Q20.

Slight growth in Oct20 while Nov20 came in flat, revenue may taper off in 4Q

Looking ahead, management shared that its container volume grew by 4-5% yoy in Oct20 but came in flat in Nov20. For full-year 2020, management is expecting a low-single digit decline in its container volume. Management also expects the transhipments of empty containers and the revenue from storage to taper off in 4Q2020.

Raising 2020-22E earnings, maintain HOLD with a higher PT of RM4.15

We lifted our 2020-22 earnings forecasts by 7-8% after incorporating the strong 3Q20 results, a stronger recovery in throughput volume (especially the gateway volume) and benign cost inflation. In tandem, we raised our DCF-derived 12-month price target to RM4.15 (from RM3.95), but maintain our HOLD rating. While we continue to like Westports for its strategically located ports, strong management and well-conceived expansion plan, the protracted delays in securing concession agreements and limited room for organic expansion may cap its upside potential. At 21.6x 2021E PER, Westports is trading close to its 5-year average forward PER of 21x, which looks fair to us. Upside risks are a strong recovery in container volume and earnings; downside risks include an economic slowdown that drags on container volume and an unexpected increase in operating costs.

Source: Affin Hwang Research - 27 Nov 2020