FY18 CNP came in 8% above our estimate as we had anticipated higher operating expenses. 4Q18 DPS of 6.33 sen was declared, also coming in above. FY18 CNP was lower YoY mainly dragged by expansion-related costs for CT8 and CT9. For FY19, management guided 3-8% growth in container volume. Upgrade our FY19 earnings by 2.4% from lowering our operating expense assumption and introduce FY20E earnings. Maintain MP with TP of RM3.75.

FY18 results came above our expectation. FY18 core net profit (CNP) of RM541.4m came above our estimate at 108% but was within consensus expectation at 103%. The positive deviation is mainly due to our higher operating expenses assumption. 4Q18 dividend per share of 6.33 sen was declared, bringing FY18 DPS to 11.73 sen, which is also slightly above our estimate. We note that the dividend declared for FY18 is in line with the group’s 75% pay-out policy.

Results highlight. YoY, FY18 CNP declined by 17%, mainly dragged by cost factors such as: (i) higher depreciation and amortisation expense of 15% from the completion of CT8-CT9 expansions in late FY17, (ii) higher finance costs (+16%) with the drawdown of borrowings in FY17 to part-finance CT8-CT9 expansions, and (iii) higher effective tax rate of 23.9% (+20.2 ppt) due to the investment tax allowance claim in FY17. This is despite FY18 container throughput volume increasing 6%, led mainly by better gateway throughput growth (+18%) from higher plastic waste import and higher export from weakening of local currency. We note that the FY18 reported revenue declined by 6% 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 FY17 reported revenue was not adjusted for. QoQ, 4Q18 CNP increased by 9% led mainly by: (i) lower operating costs, which saw gross margin at 61.2% (-2.3 ppt), (ii) lower finance cost (-8%) from saving of the commitment fee from Revolving Credit Facility from Bank of China, and (iii) higher interest income (+25%).

Outlook. Management has guided for single-digit container throughput growth of 3-8% for FY19. In view of the on-going trade war, management is unsure of the full impact but remains confident that 3% container throughput growth should be achievable. We believe that the impact from trade war to WPRTS should be minimal as it is more likely to affect trans-pacific routes. For the container tariff revision on 1 March 2019, management does not foresee further postponement. As for the expansion from CT10 to CT19, the group has almost completed the design phase and will get feedback and approvals from relevant authorities before seeking for a second piece of land for capacity expansion. No specific timeline has been laid out yet, but we do not expect CT10 to come on stream over the next 2 years.

Upgrade FY19E CNP by 2.4% and introduce FY20E earnings. Post results, we upgraded our FY19E CNP slightly by 2.4% to RM593.5m after lowering our operating expense assumption while also introducing FY20E CNP of RM634.6m. Our FY19-20E earnings is based on throughput growth assumptions of 5-5%, in-line with management’s FY19 guidance while we have also 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 modest throughput growth outlook.

Source: Kenanga Research - 31 Jan 2019