9MFY19 Core Net Profit (CNP) of RM465.5m (+20.2%) came in within expectations at 74% of both our and consensus full-year forecast. The solid results were due to higher throughput (+16%) and one-off gateway tariff hike in Mar 2019. With land reclamation works for Westports 2 expected to begin earliest by 1QFY20, we continue to view it as a longer-term prospect. Maintain MARKET PERFORM with an unchanged TP of RM4.15.

9MFY19 came in within expectations. 9MFY19 CNP of RM465.5m (+20.2%) came in within expectations at 74% of both our and consensus full-year forecasts. The negative variance from our forecast was due to lower-than-expected throughput growth. No dividend was declared in this quarter as expected since dividends are paid semiannually.

QoQ, 3QFY19 revenue rise 1% due to volume growth from container throughput of transhipment (+1%) and gateway (+1%). 3QFY19 PBT margin was 2.2ppt lower to 45.9% compared to 48.1% in 2QFY19 due to higher maintenance costs, more kWh of electricity used, greater manpower incentives; all due to higher container TEUs. This brings 3QFY19 CNP to RM159m (-4.3%). Overall, intra-Asia volumes rose 1% QoQ which accounts for 63% of total throughput which more than offset Asia-Europe volumes decline of 4% albeit accounting for 17% of total throughput.

YoY, 9MFY19 revenue was higher due to higher throughput (+16%) and one-off tariff hike in Mar 2019. 9MFY19 CNP of RM465.5m (+20%) was underpinned by: (i) 11% improvement in revenue driven by higher throughput (+16%) led by transhipment (+20%) and gateway (+8%) which more than offset lower conventional (-9%), and (ii) flattish opex and full 2QY19 impact from a 13% gateway tariff revision which took effect from March 2019 yielding 4.0 ppt expansion in GP margin. The volume recovery in transhipment throughput was largely contributed by the continued growth at the intra-Asia segment coupled with an increase in Ocean Alliance’s calls for its Asia-Europe segment of which the momentum continued. We believe trade diversions caused by the on-going US-China trade war had also helped to spur the group’s higher margin gateway segment (+8%), further contributing to the margins expansion.

Longer term prospects with Westports 2. With total CAPEX for Westports 2 (CT10-17) amounting to ~RM10b, the new CTs are expected to boost capacity by nearly double to 27m TEUS from 14m TEUs post-completion. While the heavy capex will be spread over 20 years, we believe the company would likely have to fund a portion of the capex through equity, i.e., dividend reinvestment plan. Nevertheless, we are fairly neutral towards the possibility of a dividend reinvestment plan as (i) shareholders would be given an option to receive dividends instead of reinvesting them, and (ii) EPS dilution may not be substantial at less than 10% dilution based on our preliminary calculations.

However, we view this to be a longer-term prospect for the group with anticipated full completion by 2040, thus ruling out any earnings accretive development over the next two years.

Maintain MARKET PERFORM given the lack of near-term catalysts. Nevertheless, the call is supported by a decent dividend yield of c.3% with an unchanged DDM-derived TP of RM4.15, 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. FY20E PER of 20x, or in line with its 3-year historical average, which we deem to be justifiable given its modest throughput growth outlook. Risks to our call include: (i) significant deterioration/improvement in container through-put, and (iii) changes in dividend policy.

Source: Kenanga Research - 6 Nov 2019