1HFY22 Core Net Profit (CNP) of RM314.1m (-19% YoY) came in at 47%/48% of our/consensus full-year estimates. We deem the results below our expectation on expected higher fuel cost and a lower transhipment volume in 2H. We cut our FY22E and FY23E CNP by 6% and 3%, respectively, and lowered our DCF-derived TP to RM3.55 from RM3.80. Maintain MP.

1HFY22 results below our expectation. 1HFY22 Core Net Profit (CNP) of RM314.1m (-19% YoY) came in at 47% and 48% of our fullyear forecast and consensus’, respectively. We deem the results below our expectation on expected higher fuel cost and a lower transhipment volume in 2H. The group declared a DPS of 6.91 sen in 2QFY22 (2QFY21: 8.50 sen), as expected. Note that, the group typically announces dividend half-yearly.

YoY, 1HFY22 CNP fell 14% due to higher unsubsidized diesel fuel cost (+84%) and higher effective tax rate of 33% (1HFY21: 24.1%) arising from the imposition of prosperity tax while revenue grew marginally. Higher revenue per TEU by 13% (higher ports efficiency on bigger vessels docking) and high value-added services (high yard utilisation, but not congested), were offset by a lower transhipment volume (-12%) as supply chain disruptions arising from China’s zero-Covid policy and the Ukraine-Russia war hurt global trade. Its major Intra-Asia route suffered a 5% drop in container volume. Gateway volumes helped to cushion some of the impact but were still insufficient to lift the overall volume (-8%).

QoQ, 2QFY22 CNP rose 7% mainly due to a lower effective tax rate of 26.2% (1QFY22: 39.0%) with the reversal of overprovision of tax liabilities. Transhipment volume recovered (+9%), benefitting from the Shanghai port re-opening in June 2022, but was still below the normal trade volume level.

Westports 2 to underpin long-term growth. Its new container terminal under planning is still pending negotiation with Unit Kerjasama Awan Swasta (UKAS) and the Ministry of Finance. The RM10b Westports 2 (CT10-17) will almost double its capacity to 27m TEUs from 14m TEUs currently over 20 years.

We cut FY22E and FY23E CNP by 6% and 3% to reflect high fuel cost and slower recovery in transhipment trade volume.

Maintain MARKET PERFORM with a lower DCF-derived TP of RM3.55 (from RM3.80) based on a discount rate equivalent to a WACC of 6.4% and a terminal growth rate of 2%. There is no adjustment to TP based on ESG (3-star rating as appraised by us).

Risks to our call include: (i) significant slowdown in the global economy, dampening the global containerised trade traffic, and (ii) rising operating costs, particularly fuel.

Source: Kenanga Research - 29 Jul 2022