WPRTS’s 1QFY24 results met expectations. Its 1QFY24 core net profit grew 12% YoY driven by a 5% increase in container throughput, slightly better yields, and lower finance cost. It reiterated guidance for a cautious outlook on the prolonged war in the Middle East. We maintain our forecasts, TP of RM3.80 and MARKET PERFORM call.

Its 1QFY24 results met expectations at 26% and 25% of our full-year forecast and the full-year consensus estimate, respectively. No dividend was declared as WPRTS typically distributes half-yearly dividends.

YoY, its 1QFY24 revenue rose 6%. A stronger container volume (+5%) was boosted by the improved average revenue per TEU (+1% compared to negative growth throughout last year) from better revenue mix toward higher tariff rate of gateway cargoes. Additionally, storage income normalised to pre-pandemic levels.

Its transhipment volume fell 3%. The prolonged war in the Middle East with no immediate sign of the Red Sea conflict de-escalating, weighed down on the Asia-Europe trade and led to intermittent port congestions due to vessels bunching (vessels arrive back-to-back or within a short time interval between each vessel). Adding salt to the wound, a shipping liner has ceased its operations in Malaysia on docking ban on Israel-flagged ships. Meanwhile, its gateway container volume (+17%) remained strong on the back of brisk exports by local manufacturers (partly fuelled by the weak MYR).

On the other hand, its conventional cargo volume eased to 2.76m metric tonnes (-4%) due to lower break bulk throughput (ingots, coils, mixed steel and rubber) and the transition toward containerised cargoes, which more than offset the higher throughput of liquid bulk cargoes (with increased LPG, palm oil and gasoline/diesel products handled).

Its core net profit grew by a sharper 12% due to a better mix skewed towards higher-margin gateway cargoes and lower finance cost (-10%; yearly sukuk repayment of RM125m in June 2023 and RM50m in 1QFY24, with balance sukuk borrowings at RM800m).

QoQ, its 1QFY24 revenue fell 2% due to a seasonally weaker container volume (-7%) partially cushioned by an improved average revenue per TEU (+5%). However, its core net profit only fell 1% on a better mix towards higher-margin gateway cargoes.

The key takeaways from the results briefing are as follows:

1. It maintained its guidance for a low single-digit container volume growth rate in FY24 (vs. our assumption of 4%) as it believes the prolonged war in the Middle East with no immediate sign of the Red Sea conflict de-escalating will continue to weigh down on the Asia-Europe trade. The diversion from Suez Canal to the Cape of Good Hope has resulted in a longer voyage for the Asia-Europe route (which contributes to 30% of global container volume), reducing the frequency of calls the shipping service could make at WPRTS (and all other ports in the region). Not helping either, the drought-induced low water levels of Panama Canal will continue to disrupt the movement of shipping liners. Nonetheless, it is slightly more positive on FY25, guiding for a single-digit container volume growth rate (vs. our assumption of 4%).

2. The diversion of shipping liners from Suez Canal to the Cape of Good Hope has resulted in intermittent port congestion due to vessels bunching (vessels arrive back-to-back or within a short time interval between each vessel). Nevertheless, it remains optimistic that the port congestion is manageable. The container yard utilisation is at the optimal level of about 80% while the percentage of empty container boxes has normalised to the pre-pandemic level (at 26% of total containers, lower compared to 27% as three months ago). Also, with its container yard operating at an optimal level, there are efficiency gains.

3. Meanwhile, the approvals for container tariff revision and the Westports 2 (WP2) expansion project are still pending. On the other hand, the new RM5.0bn Sukuk Wakalah programme has now been put in place with initial drawdown within this year, mainly to finance the land reclamation and capital dredging of WP2. It expects slight increases in its finance cost (from the initial drawdown of the sukuk) and fuel bills (elevated diesel price which is unsubsidised).

Recall, after much delay, WPRTS in Dec 2023 finally signed a Third Supplemental Privatisation Agreement with the federal government and PKA governing the development of CTs 10 to 17, which also entails the extension of the port operation concession for both existing facilities (i.e. CTs 1 to 9) and new facilities (i.e. CTs 10 to 17) by 58 years from Sep 2024 to Aug 2082. The new CTs will nearly double its capacity to 27m TEUs from 14m TEUs, spread over 26 years.

Forecasts. Maintained.

Valuations. We also maintain our DCF-derived TP at RM3.80 which is based on a discount rate equivalent to its WACC of 6.1% 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).

Investment case. We 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, its container volume growth is limited as middle-east conflicts persist. 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 and tariff revision fail to materialise.

Source: Kenanga Research - 3 May 2024