WPRTS’s 1HFY23 results met expectations. Its core net profit rose 20% YoY on a flattish top line thanks to lower fuel cost and nonrecurrence of the prosperity tax. It reiterated its guidance for container volume growth rates of 0% to 5% in FY23 and singledigit in FY24. We maintain our forecasts, TP of RM3.65 (WACC: 6.4%, TG: 2%) and MARKET PERFORM call.

Its 1HFY23 core net profit of RM377.7m (excluding one-off items of RM0.7m) met expectations at 54% and 53% of our full-year forecast and the full-year consensus estimate, respectively. The group declared a first interim dividend of 8.19 sen for the 1H of the year, which is within our expectation.

YoY, its 1HFY23 revenue rose 3%. Stronger container volume (+8%) was offset by lower average revenue per TEU (-4%) on lower storage income as port congestion eased.

Its transhipment volume rose 4% driven by the normalisation of shipping rates on the return of larger container ships on the heels of full reopening of borders (vs. the deployment of smaller container ships by shipping lines during the pandemic). Recall, WPRTS caters to larger container ships while rival Northport largely handles smaller ones. Meanwhile, its gateway container volume (+13%) remained strong on the back of brisk exports by local manufacturers (partly fuelled by the weak ringgit).

On the other hand, its conventional cargo volume eased marginally to 5.42m metric tonnes (-1%) due to lower break bulk throughput (ingots, coils, mixed steel and rubber) and the transition toward containerised cargo which more than offset the throughput increase at liquid bulk (with more LPG, palm oil and gasoline/diesel products).

Its core net profit surged by 20% due to lower diesel fuel cost (-24%; which is unsubsidised), lower finance costs (-23%; yearly sukuk repayment of RM125m in June 2023, with balance sukuk borrowings at RM850m), and the normalisation of its effective tax rate to 22.9% (1HFY22: 33.0%) in the absence of the prosperity tax.

QoQ, its 2QFY23 revenue shot up (+6%) from the lower base of long Chinese New Year holiday in China, and rose accordingly with stronger transhipment volume (+4%), and gateway container volume (+9%). Its core net profit was equally strong (+6%) on lower diesel fuel cost (-5%) and finance costs (-11%) due to the abovementioned reasons.

The key takeaways from the results briefing are as follows:

1. It reiterated its guidance for container volume growth rates of 0% to 5% (adjusting for exceptionally high empty containers in 2QFY23) in FY23 and single-digit in FY24 (vs. our more conservative assumptions of 1-3%, respectively). In the event of a global recession, it holds the view that it will be brief and shallow.

2. For the quarter, both transhipment and gateway volumes were inflated by the repositioning of empty container boxes back to China (at 29% of total containers, vs. 26.5% a year ago) before the manufacturing peak season in 3QCY23 (as manufacturers ramp up production for the year-end shopping season). The empty containers have mostly been shipped out and should normalise in coming quarters.

3. The port congestion has come to an end, as reflected in the normalisation of its container yard utilisation to the optimal level of about 80%. On one hand, WPRTS sees lower storage incomes. On the other hand, it is regaining customers lost to a neighbouring port at the height of port congestion, translating to a higher container volume. Also, with its container yard operating at an optimal level, there are efficiency gains.

4. The Westports 2 expansion project is still pending finalisation from Unit Kerjasama Awam Swasta (UKAS) and the Ministry of Finance. WPRTS is hopeful that the signing could happen by the August 2023 deadline and noted that the government 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 maintain our forecasts and DCF-derived TP at RM3.65 which is based on a discount rate equivalent to its 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).

We continue to like WPRTS for: (i) its resilient earnings underpinned by long-term contracts with key clients such as Ocean Alliance, (ii) its long-term growth prospect driven by the Westports 2 expansion project, and (iii) its price competitiveness, i.e. lower transhipment tariffs vs. peers such as Port of Tanjung Pelepas and Port of Singapore. However, these are weighed down by the unfavourable outlook of the seaport segment amidst the slowing global trade due to a weak global economic outlook on a high interest rate environment. Maintain MARKET PERFORM.

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

Source: Kenanga Research - 28 Jul 2023