The 1Q17 results were deemed slightly below expectations due to weaker-than-expected volume growth, coupled with higher costs. With volume outlook remaining uncertain due to the reshuffling of shipping alliances, forward volumes are anticipated to be weaker despite expansion plans remaining on track. Thus, we cut FY17-18 estimates by 14-6%, with more clarity of volume prospect expected in 4Q17 and beyond. Maintain MARKET PERFORM, with lowered TP of RM4.15.

Slightly below expectations. 1Q17 core net profit (CNP) of RM141.9m came in at 20%/22% of our/consensus forecasts, which we deemed as slightly below expectation as we had expected stronger volume growth. No dividends were announced, as expected.

Weaker earnings YoY. Although operating revenue saw a marginal increase of 1% YoY to RM438.6m from RM436.3m, mainly contributed by a slight 1% increase in container throughput from 2.41m to 2.43m TEUs, 1Q17 CNP declined 7% YoY compared to 1Q16 of RM150.7m (after adjusting for investment gain), caused by weaker margins due to higher fuel costs.

Much weaker sequentially. QoQ-wise, operating revenue saw a drop of 7% from RM469.1m in 4Q16. Total container throughput fell 5% from 2.55m TEUs due to stronger year-end trading volumes last quarter, with transhipment volume declining 4% from 1.89m to 1.82m TEUs, while gateway fell 8% from 0.66m to 0.61m TEUs. Furthermore, effective tax rate had also increased to 21% from last quarter’s 11% due to lower investment tax allowance from capex spending. As a result, CNP declined 14% from last quarter’s RM164m (after adjusting for losses in PPE written-off).

Expansion pipeline in place. Phase 2 of CT8 is expected to commence operations in mid-2017, while phase 1 of CT9 is expected to be completed by end-2017. All-in, this is expected to increase WPRTS’ capacity to 13.5m TEUs by end-2017, from 12m TEUs currently, with total expected capex set at RM851-149m for FY17-18. We believe the expanded capacity should help ease capacity utilisation to a more manageable and optimum level of 70-80%, as compared to an estimated 83% capacity utilisation as at end-FY16.

Volume outlook remains uncertain. While 1Q17 earnings were business-as-usual for WPRTS, we expect to see some volume fluctuations in the coming quarters from the phase-in phase-out period from the shipping alliances reshuffling, which took effect starting 1 April 2017. While the Ocean Alliance has adopted a dualhub approach, we are expecting some volume losses from CMA CGM being shifted to PSA. Meanwhile, volume impact from UASC and its merger with Hapag-Lloyd also remains unclear at this juncture. As such, we trimmed FY17-18E earnings by 14%-6% to account for expected weaker volumes. Overall, we expected better clarity in 4Q17 and FY18 once volumes normalised to post-reshuffling levels.

Maintain MARKET PERFORM with lowered TP of RM4.15 from RM4.33 previously. Our DDM-derived TP is lowered following the earnings cut, with forward DPS also being trimmed by the same quantum, adhering to the group’s 75% dividend pay-out policy. Our TP implies a forward PER of 24x, slightly above its 3-year historical mean of 23x. Risks to our call include: (i) higher-than-expected throughput growth, and (ii) lower-than-expected operating costs.

Source: Kenanga Research - 28 Apr 2017