WPRTS’s 9MFY22 results met expectations. Its topline grew as a contraction in container volume was more than offset by higher average revenue per TEU due to strength in gateway cargoes. It guided for its overall FY23 container volume growth at 0% to +5% with a recovery expected in 2HFY23. We maintain our forecasts, DCF-derived TP of RM3.40 (WACC: 6.4%; TG: 2%) and MARKET PERFORM call.

9MFY22 core net profit of RM464.5m came in within expectations at 79% and 75% of our full-year forecast and the full-year consensus estimates, respectively. No interim dividend was declared as usual.

YoY, 9MFY22 revenue grew marginally (+2%). A contraction in container volume (-6%) was more than offset by a higher average revenue per TEU (+9%).

The lower container volume was due to a sharp drop in the transhipment volume (-13%) affected by supply chain disruptions arising from China’s zero-Covid policy and the Russia-Ukraine war hurting global trade. This was partially mitigated by a strong gateway container volume (+7%) on the back of brisk exports by local manufacturers spurred by the ringgit’s weakness.

Meanwhile, the higher revenue per TEU was driven by the strong gateway volume as mentioned, which typically commands a better rate as compared to transhipment.

On the other hand, the conventional cargo volume rose to 8.9m metric tonnes (+7%) driven by: (I) inbound and outbound cargoes of recycled paper and from IKEA’s regional distribution centre in Malaysia, and (ii) construction equipment trade.

Core net profit fell by 15% due to higher unsubsidized diesel fuel cost (+81%) and higher effective tax rate of 32.9% (9MFY21: 24.4%) arising from the imposition of prosperity tax.

QoQ, 3QFY22 revenue grew marginally (+2%). Its container volume (+4%) picked up, driven mainly by gateway container volume (+11%) while the transhipment container was flattish. However, 3QFY23 core net profit fell by 7% mainly due to higher effective tax rate of 32.9% (2QFY22: 26.2%) in the absence of overprovision of tax liabilities.

The key takeaways from the results briefing are as follows:

1. WPRTS maintained its guidance for its FY22 overall container volume growth at 0% to -5%. With the recent stricter zero-Covid policy by China impacting supply chains in Ningbo, Shanghai, and Tianjin, there could be downside to container volume. We are keeping our slightly more conservative assumption of a 6% decline in overall container volume in FY22.

2. For FY23, WPRTS guided for its overall container volume growth to come in at 0% to +5%. In the event of a global recession, it holds the view that it will be brief and shallow, with a recovery expected in 2H 2023. On the back of slowing global trade and no apparent signs pointing towards an end to the supply chain disruptions, we maintain our cautious stance with our assumption of FY23 container volume easing by another 1%.

3. WPRTS is gradually wooing back customers lost to a neighbouring port at the height of port congestion recently, as the utilisation at its container yard is normalising to the optimal level of about 80%.

4. It is positive on the growth prospects of conventional cargoes driven by the commissioning of new paper recycling plants in Banting, Selangor, by China-based Nine Dragons Paper Holdings Ltd, in 2023.

5. The Westports 2 expansion project is still pending finalisation with Unit Kerjasama Awam Swasta (UKAS) and the Ministry of Finance. WPRTS is hopeful that the signing could happen by mid-2023 and mentioned that the incumbent government prior to the dissolution of parliament had “principally agreed” to the key terms of the concession agreement. Recall, the RM10b Westports 2 (CT10-17) will almost double its capacity to 27m TEUs from 14m TEUs currently over 20 years.

We continue to like WPRTS for its: (i) resilient earnings underpinned by long-term contracts with key clients such as Ocean Alliance, (ii) long-term growth driven by the Westports 2 expansion project, and (iii) price competitiveness, i.e. lower transhipment tariffs vs. peers such as Port of Tanjung Pelepas and Port of Singapore. However, these are weighed down the unfavourable outlook of the seaport segment amidst the slowing global trade on the back of seemingly prolonged inflation and hence a high interest rate environment globally, an energy crisis in Europe and intermittent lockdowns in China.

Maintain MARKET PERFORM with DCF-derived TP of RM3.40 based on a discount rate equivalent to a WACC of 6.4% and a terminal growth rate of 2%. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

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

Source: Kenanga Research - 7 Nov 2022