1H18 results came in weaker as expected, largely impacted by higher costs coupled with slightly lower container throughput by 3%, as a result of restructuring activities among shipping liners. Moving forward, management retains its throughput guidance of low single-digit growth for FY18. Impact from trade war fights is also expected to be minimal on WPRTS, at least for the immediate term. Maintain MARKET PERFORM with unchanged TP of RM3.50.

1H18 results within expectations. WPRTS recorded 1H18 core net profit of RM245.6m, coming in within expectations at 49% and 45% of our and consensus forecasts, respectively. Dividend of 5.4 sen per share was also announced (versus 1H17 of 6.372 sen per share), as expected, adhering to the group’s 75% dividend pay-out policy.

Weaker bottom-line earnings. YoY, 1H18 core profits dropped 15%, mainly dragged by costs factor, such as: (i) increased tax expenses by 25% as tax incentives expired late last year, (ii) steeper finance cost by 25%, following total borrowings drawdown of RM350m last year, and (iii) additional amortisation and depreciation expenses by 19% on the completion of CT9 expansions late last year. Moreover, 1H18 container throughput was also lower by 3% YoY to 4.5m TEUs, possibly due to some tail-end residual effects from M&A activities and alliance reshuffling among the shipping liners that took place last year. This has resulted in a drop in transhipment throughput by 13%, although offset by gateway throughput growth of 20% as the group managed to wrestle back some market share from Northport in light of its available capacity. As for the individual quarter of 2Q18, core profit of RM121.8m declined 18% YoY on similar reasons, namely tax expense (+55%), finance costs (+28%) and depreciation and amortisation (+18%), with container throughput improving a marginal 1% YoY. Sequentially, core profit was relatively flat QoQ (-2%), with container throughputs mostly unchanged at 2.3m TEUs for both quarters.

Maintaining throughput outlook. Management has maintained its container throughput guidance of low single-digit percentage growth for FY18. Impact from recent trade war should mostly impact transpacific routes, and thus, management sees very minimal impact on WPRTS, at least for the immediate term. Meanwhile, expansion for CT10-19 is seen to be a longer-term prospect (expecting gradual development, with full completion by 2040), and as such, we do not believe there will be any 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).

Maintain MARKET PERFORM, with unchanged DDM-derived TP of RM3.50, based on; (i) 6.2% discounting rate, (ii) 1% terminal growth, and (iii) unchanged dividend pay-out policy of 75%. No changes were also made to our FY18-19E earnings, with our model imputing a container throughput growth assumption of 3-5%. Risks to our call include: (i) vast deterioration in container throughput, (ii) escalation in operating costs, and (iii) changes to dividend policy.

Source: Kenanga Research - 26 Jul 2018