9M18 earnings came in line at 77%/75% of our/consensus full-year estimates. 9M18 CNP was lower YoY despite stronger throughput volume, mainly dragged by cost factors arising from the CT8 and CT9 expansions in FY17. Moving forward, management guided low single-digit growth in container volume for FY18-19. Impact from trade war is also expected to be minimal in the near term. Maintain MARKET PERFORM with TP of RM3.75.

9M18 results came within expectations. 9M18 core net profit (CNP) of RM387.2m came within both our and consensus estimates at 77% and 75%, respectively. No dividends were declared, as expected.

Results Highlight. YoY, 9M18 CNP declined by 12%, mainly dragged by cost factors such as: (i) higher depreciation and amortisation expense of 18% from the completion of CT8-CT9 expansions in late FY17, (ii) higher finance costs (+22%) with the drawdown of borrowings in FY17 to part-finance CT8-CT9 expansions, and (iii) higher effective tax rate of 23.5% (+6.4 ppt) due to the investment tax allowance claim in FY17. This is despite 9M18 container throughput volume increasing by 2%, led mainly by better gateway throughput growth (+20%) from higher waste and polymer imports, which offset the decline in transhipment throughput (-5%). We note that the reported 9M18 reported revenue declined by 7% due to the MFRS15 accounting requirement (i.e. marketing discounts are now netted-off at revenue line than being recognised in cost of sales) of which 9M17 reported revenue was not adjusted for. QoQ, 3Q18 CNP increased by 17% led by: (i) higher revenue (+6%) from higher container throughput volume (+9%), (ii) better gross margin at 58.9% (+1.3 ppts), and (iii) lower finance cost (- 4.1%) for saving of commitment fee on cancellation from Revolving Credit Facility from Bank of China, and (iv) lower effective tax rate at 21.9% (-2.7 ppt).

Outlook. Our container throughput growth assumptions for FY18-19E are at 3-5%, in line with management’s guided growth of low single-digit percentage growth for FY18 and 3-8% growth for FY19. Moreover, we believe the impact from the trade war to WPRTS is likely to be minimal in the near term as it is more likely to affect trans-pacific routes. As for the expansion from CT10 to CT19, the group had recently acquired a 381ac leasehold land under the sea in September 2018 at Pulau Indah, Port Klang for RM116.2m for the purpose of terminal expansion. The management is seeking to acquire another piece of land for the same purpose (likely to be of same land size but above water) at a higher acquisition price. However, no specific timeline has been laid out yet. The expansion is seen as a longer-term prospect (expecting gradual development with full completion by 2040) and we do not think there will be any earnings accretive development in the next 2-3 years.

Maintain FY18-19E earnings. Post results, we keep our earnings estimates unchanged at RM500.6-579.5m for FY18-19. Note that our estimates had already accounted for the March 2019 implementation date of the container tariff hike.

Maintain MARKET PERFORM with an unchanged DDM-derived TP of RM3.75, based on: (i) 6.2% discounting rate, (ii) 1% terminal growth, and (iii) unchanged dividend pay-out policy of 75%. Our TP implies a Fwd. FY19E PER of 22x, in line with the historical average, which we think is fair given the mild throughput recovery outlook.

Risks to our call include: (i) deterioration/improvement in container throughput, (ii) escalation/decline in operating costs, and (iii) changes to dividend policy.

Source: Kenanga Research - 12 Nov 2018