Previewing the upcoming 1Q18 results, we expect throughput to be weaker YoY as the alliance reshuffling was only effective Apr 2017. Overall, we expect low single-digit growth for container throughput for the year, but anticipate deterioration in bottomline earnings due to higher taxes and finance costs. Following this, we cut FY18-19E CNP by 22-19%. All-in, maintain MP call with lowered TP of RM3.60, as we believe the current level is fairly valued after a 12% drop over the past 12 months.

Throughput outlook for FY18. In terms of container throughput, we believe the 9m TEUs in FY17 should serve as a new low base for organic growth moving forward, with low single-digit percentage growth expected for FY18. Growth will be expected to be driven by: (i) continued growth in gateway volumes on the back of robust economic growth figures, and (ii) recovery of transhipment volumes in a postreshuffling business environment. As for the upcoming 1Q18 results (tentative release next week), we expect numbers to come in poorer on a YoY basis as the reshuffling of shipping alliances only came into effect April 2017.

However, lower earnings expected for the year. Despite the expected overall recovery in container throughput, we believe bottomline earnings will see some deterioration in FY18. Our current CNP forecasts of RM500.6m/RM539.4m for FY18E/FY19E imply earnings growth of -23%/8%. The poorer earnings are mostly attributed to: (i) reversion of the effective tax rate closer to usual corporate tax rates (compared to the effective tax rate of 3.7% in FY17) given the expiration of tax incentives in Dec 2017, and (ii) increased finance costs following borrowings drawdown of RM250m in FY17. That said, on the EBIT level, our FY18-19E forecasts projects growth of 3-6%. Furthermore, note that FY18 will see the full compliance of MFRS 15, superseding the previous MFRS 8 and MFRS 111 reporting standards. This would result in significant changes towards its revenue and cost of sales line (i.e. marketing discounts are now netted-off in revenue line, rather than being recognised in cost of sales), but is largely expected to have a neutral impact towards bottom-line earnings.

CT10-19 expansions as longer-term prospects. Having received an Approval-in-Principle for the expansions of CT10-19, we believe this is a longer-term prospect for the group. WPRTS had just completed the development of CT9 Phase 1 last year, bringing container capacity to 14m TEUs per annum (from around 12m TEUs the year prior). As such, we do not expect any further developments beyond CT9 in the next 2-3 years. Over the longer-term, CT10-19 is estimated to bring the group’s container capacity up to 30m TEUs per annum.

Lowered FY18-19E earnings. Post-review, we lowered FY18-19E CNP by 22-19%, taking into account the aforementioned higher taxes and finance costs. Our forecasts assumed total container throughput growth of 3-5% for FY18-19E.

Maintain MARKET PERFORM. We lowered our DDM-derived TP to RM3.60 (from RM3.70 previous), following the earnings adjustments and rolling-forward of our valuation base-year to FY19, based on the assumptions of: (i) 6.2% discounting rate, (ii) 1% terminal growth, and (iii) unchanged dividend policy of 75%. We maintain our MARKET PERFORM call as we view its current share price as fairly valued, having dropped 12% over the past 12 months. At current prices, trading valuations are near -1 S.D. and -1.5 S.D. of its average forward PER and PBV, respectively. Risks to our call include: (i) lower-than-expected growth in gateway container throughput, and (ii) slower-than-expected recovery in transhipment container throughput.

Source: Kenanga Research - 20 Apr 2018