We visited WPRTS in Pulau Indah, Port Klang and came back feeling reassured on management’s capabilities and commitment to remain competitive as outlined by their expansion plans. Additionally, announcement of the new Ocean Alliance is likely one of the best possible scenarios for WPRTS considering it comprises mostly WPRTS major clients under one alliance, making it easier for WPRTS to retain its main clients. However, there remain macro-economic uncertainties such as; (i) global economy slowdown and, (ii) the volatility in currency, which is expected to put YoY volume growth under pressure. That said, we have already accounted for lower volume growth previously, at 4.1- 4.2% in FY16-17E (vs. 12%-8% in FY14-15). As such, we make no changes to our MARKET PERFORM call and TP of RM4.27. At current levels, WPRTS is commanding decent yields of 3.3%-3.5% in FY16-17E.

CAPEX updates. WPRTS is currently focusing on the expansion of CT8, which is divided into 2 phases. Phase 1 is a 300m wharf, already equipped with 4 new 52-meter high QCs, to be fully operational by mid-FY16, which appears almost complete at the time of our visit. Phase 2, is an additional 300m wharf, CT8 yard, 2nd container gate and more TOEs being delivered, scheduled to be operational by end FY17 to early FY18. Post completion, handling capacity is expected to increase to 13.5m TEUs.

New Ocean Alliance to house most of WPRTS existing clients. Prior to this, WSPRTS services mostly the Ocean 3 Alliance (O3) which makes up 55% of total volume, of which, CMA CGM alone makes up 36% of total volume, while other clients include Evergreen, Yang Ming, OOCL and COSCO. The concern of a shake-up in the alliances prior to this was that WSPRTs container throughput would be affected should its existing clients break up into various new alliances. However, the new Ocean Alliance (announced 20th April 2016, post our site visit) turned out to be one of the best possible scenarios for WPRTS considering it comprises most of WPRTS’ existing clients, all under one alliance. This will make it easier for WPRTS to retain its major customers, being part of the same alliance.

CMA CGM likely to stay with WPRTS post acquisition of APL (NOL). CMA CGM (CMA) is expected to acquire APL (NOL), pending approval from antitrust authorities (by end April-16), and is expected to be completed by Aug-16. We believe CMA will continue to maintain Westports as a base for its operations post the CMA APL (NOL) acquisition as it would prefer a ‘two hub’ approach despite APL (NOL) has a strong footing in the Singapore port (PSA). A ‘two hub’ approach will allow the new entity to exploit the local markets in each locale, as well as being able to shift easily between both hubs. Furthermore, considering the strong existing relationship between CMA and WPRTS as well as the cost advantage WPRTS possesses as compared to other peers (PTP and PSA), we think it is unlikely for CMA to shift their base of operations significantly away from WPRTS. Assuming a worst case scenario, and the possibility that CMA’s ‘two hub’ approach still leads to volume declines to WPRTS, we estimate that a 1.0% decline in our FY16-17E throughput volume forecast (currently 4.1-4.2% in FY16-17E) will translate to 1.1-1.2% decline to earnings.

We make no changes to our 4.1%-4.2% throughput growth in FY16-17E. We are expecting low single digit throughput growth of 4.1%-4.2% to 9.42-9.82m TEUs in FY16-17E. This is lower than the previous year’s growth rate (12%-8% in FY14-15), but we are comfortable with our conservative growth forecast, which is also in line with management guidance for now due to: (i) global economy slowdown, (ii) the volatility in currency from challenges in FY16, and (iii) remaining uncertainties for some shipping lines (i.e. UASC).

Maintain FY16-17E earnings of RM643-RM684m. We have also accounted for positives such as lower effective tax rates of 15% in FY16-17E. Based on our FY16- 17E earnings of RM643-684m, a 75% payout ratio implies 14.1-15.0 sen NDPS (3.3- 3.5% yields). We reiterate our MARKET PERFORM call and DDM-derived TP of RM4.27 based on a 6% discount rate, and an implied FY16 PER of 22.6x.

Source: Kenanga Research - 22 Apr 2016