The overall weaker 1Q18 results were within expectations, largely impacted by higher taxation and finance cost coupled with lower container throughput by 7% YoY. For FY18, we are anticipating container throughput growth at low single-digit percentage, driven by organic growth from the low base in FY17. Meanwhile, expansions for CT10-19 are seen as longer-term prospects. Maintain MARKET PERFORM with lowered TP of RM3.50.

No surprises. 1Q18 net profit of RM123.8m (YoY -12%, QoQ -41%) came in within expectations at 25%/22% of our/consensus full-year earnings forecasts. No dividends were declared, as expected.

Weaker bottom-line earnings, as expected. The overall weaker 1Q18 results were well within our expectation (with reference to our results preview report dated 20 April 2018). YoY, the poorer performance was due to (i) lower container throughput by 7%, as a result of the reshuffling of shipping alliances, coupled with (ii) increased finance costs by 22%, following borrowings drawdown of RM350m in FY17. Total container throughput for the quarter came in at 2.25m TEUs, down from 2.43m TEUs in 1Q17. Bulk of the deterioration came from transhipment throughput (-19%), while offset by growth in gateway volumes (+26%). Notably, transhipment:gateway container throughput mix is now at 66%:34% as compared to 75%:25% a year ago.

Sequentially, net profit plunged by 41% QoQ, largely due to higher tax expenses of RM40m, as compared to positive tax rebate of RM65.5m in 4Q17. Container throughput remained relatively flat QoQ (+1%).

Mild throughput growth expected in FY18. We were guided to container throughput growth of low single-digit percentage in FY18, growing organically from the low base in FY17, driven by (i) normalisation of a post-reshuffling business environment, coupled with (ii) growth in gateway volumes, backed by robust macro-economic growth figures. We made no changes to our FY18-19E numbers, with forecast total container throughput growth of 3-5%.

Meanwhile, expansion for CT10-19 is seen to be a longer-term prospect (expecting full completion by 2040), and as such, we do not believe there will be any further earnings accretive development in the next 2-3 years. All-in, CT10-19 is expected to double the group’s container handling volume to about 30m TEUs per year (from currently 14m TEUs per year). We believe the group will be focusing efforts to achieving higher utilisation of its current capacity for now, before pursuing further developments in CT10-19.

Maintain MARKET PERFORM. We lowered our DDM-derived TP slightly to RM3.50 (from RM3.60 previously) after fine-tuning our forward growth assumptions. Our DDM-valuation is based on these assumptions; (i) 6.2% discounting rate, (ii) 1% terminal growth, and (iii) unchanged dividend payout policy of 75%.

We are maintaining our MARKET PERFORM call for now, as we view current prices to be fairly valued, having dropped 18% over the past 12 months. At current prices, trading valuations are near -1S.D. and -2S.D. of its average forward PER and PBV, respectively.

Risks to our call include: (i) lower-than-expected growth in gateway volumes, and (ii) slower-than-expected recovery in transhipment container throughput.

Source: Kenanga Research - 26 Apr 2018

Source: Kenanga Research - 26 Apr 2018