Period

2Q15/1H15

Actual vs. Expectations

1H15 net profit of RM242.3m (+4.6%) was within expectations, accounting for 47.8% and 45.7% of our in-house forecast and consensus’ estimates, respectively.

Dividends

WPRTS declared a first interim dividend of 5.32 sen/share (1H14: 5.10 sen/share), representing a payout ratio of 74.9%. This is in line with our expectation.

Key Results Highlights

YoY, 1H15 operational revenue grew 6.3% to RM773.3m on the back of 10% growth in container throughput volume (from 4.02m TEUs to 4.42m TEUs). However, PBT was able to record a surge of 14.7% to RM321.6m thanks largely to the lower fuel costs (-26%), which expanded the PBT margin by 3.7 pptx to 40.0%. Net profit growth was much lower at 4.6%, mainly attributable to the higher effective tax rate of 24.7% as compared to 17.4% as its Investment Tax Allowance (ITA) expired since beginning of the year.

QoQ, 2Q15 operational revenue was flattish (-0.1%) as container throughput was 4.4% lower mainly due to the dip in Intra-Asia trade lane growth (from 17% to 1%) which can be largely attributed to the slowdown in China. Nonetheless, the Group still managed to grow its net profit by 1.6% to RM122.1m thanks to operating efficiencies (operating costs down 2.3%) as net margin was maintained above the 30% mark.

Outlook

Moving forward, the Group expects its throughput volume to grow by 5%-10% (FY14:12.1%), which is in line with our forecast of 7.8%. The next phase of expansion plan in Container Terminal 8 (CT8) will contribute its initial capacity starting early 2016 while full completion in mid-2017 will boost the current capacity of 11.0m TEUs by 22.7% to 13.5m TEUs. Meanwhile, the Group has submitted the application for ITA but remained uncertain of the authorities’ decision on the appeal. As such, we keep our statutory tax rate assumption unchanged at this juncture.

As for the port tariff hike, management is confident of favourable outcome as soon as at the end of 3Q15. However, earnings impact will be minimal or none in FY15 as management conservatively expects the implementation in FY16. We understand that gateway container rates will be adjusted to the new rates once the new tariff is implemented, but the Group would need to negotiate with its clients on any potential revision in transhipment container rates upon the expiry of respective contracts thus the hike might be staggered over the longer term. Based on our back-of-the-envelope calculations, we estimate its FY16 net profit to grow 10%-15% assuming a tariff hike of 20%.

Change to Forecasts

We made housekeeping changes to update on the annual report figures. As a result, FY15E-FY16E net profits were nudged higher by 1%-0.2%.

Rating

Maintain UNDERPERFORM

Current valuation is less compelling as the market might have overplayed the tariff hike. Last closing price indicated FY16E PER of 24.4x and dividend yield of 3.1%.

Valuation

We lift our Target Price to RM3.99 (from RM3.29), implying 24.3x FY16E. TP is based on unchanged DDM valuation but with a lower discount rate of 7.0% from 7.3% after lowering our risk (Beta) assumption from 0.57 to 0.48 (current trading Beta). We think that the lower risk assumption in valuation can match the fundamental picture considering the robust growth in volume as well as the continuous improvement in operating efficiencies.

Risks to Our Call

Favourable outcome in ITA application

Higher-than-expected throughput growth

Source: Kenanga Research - 3 Aug 2015