1HFY20 Core Net Profit (CNP) of RM310.8m (+1.5% YoY) came in within expectations at 50%/55% of our/consensus full-year forecast. Management highlighted that throughput in 2H is expected to improve with June and July showing m o-m improvement. With land reclamation works for Westports 2 expected in FY21, we continue to view it as a longer-term prospect. No changes to our FY20E/FY21E earnings forecasts and TP of RM3.65. Maintain MP.

1HFY20 Core Net Profit (CNP) of RM310.8m (+1.5% YoY) came in within expectations at 50%/55% of our/consensus full-year forecast. A 1st interim DPS of 5.05 sen (1HFY19: 6.74 sen) was declared which is below our expectation. We cut our FY20 DPS from 13.7 sen to 11 sen as per management guidance, which we have forewarned in our 1QFY20 result note that management does not discount a lower payout ratio.

QoQ, 2QFY20 revenue fell 9% due to lower volume from transhipment (- 7%) and gateway (-13%). 2QFY20 EBIT margin was lower by 1.8ppt to 44.1% compared to 45.9% in 1QFY20 due largely to the apportionment of Oracle payment mitigated by lower fuel cost (-37%), better efficiencies and lower manpower cost (-3%). Excluding one-off PPE written off (RM6.9m), 2QFY20 CNP came in at RM141.1m (-17%) due to lower revenue. Overall, 2QFY20 intra-Asia and Asia-Europe volumes fell 13% and 2%, respectively, which accounts for 79% of total throughput.

YoY, 1HFY20 revenue rose 4% due to higher gateway (+2%) and the tariff hike in Mar 2019. This brings 1HFY20 CNP to RM310.8m (+1.5%), underpinned by: (i) 4% improvement in revenue driven by higher gateway (+2%) but lower transhipment (-14%), and (ii) a full quarter tariff hike impact from a 13% gateway tariff revision which took effect from March 2019. Note that Lower EBIT due to general bad debt provision and apportionment of Oracle payment.

Longer term prospects with Westports 2. Management highlighted that June and July throughput growth picked up and were higher m-o-m but still lower Y-o-Y. In terms of dividends, payout ratio guidance is lowered from 75% to 60% in FY20 to conserve cash for 2021 when the new container terminal expansion project is expected to commence with the purchase of Marina Land and land reclamation. We highlight that of the RM16.8m provision for trade receivables made in 1Q20, management is hopeful of recovering and potentially writeback in 3Q or 4Q 2020. With total capex for Westports 2 (CT10-17) amounting to ~RM10b, the new CTs are expected to nearly double in capacity to 27m TEUS from 14m TEUs. 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. 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 very long-term play for the group with anticipated full completion by 2040, thus ruling out any earnings accretive development over the next few years.

Maintain MP. Our DDM-derived TP is RM3.65 based on: (i) 6.2% discounting rate, (ii) 1% terminal growth, and (iii) dividend pay-out policy of 75%. The saving grace is a 3.8% dividend yield.

Risks to our call include: (i) significant deterioration/improvement in container through-put, and (iii) changes in dividend policy.

Source: Kenanga Research - 27 Jul 2020