WPRTS’s 1HFY24 results met expectations. Its 1HFY24 core net profit grew 8% YoY driven by a 3% increase in container throughput, slightly better yields and lower finance cost. It reiterated guidance for a cautious outlook on prolonged conflicts in the Middle East. We maintain our forecasts, TP of RM3.80 and UNDERPERFORM call.

Its 1HFY24 results met expectations at 51% and 50% of our full-year forecast and the full-year consensus estimate, respectively. The group declared a first interim dividend of 8.89 sen, as expected.

YoY, its 1HFY24 revenue rose 4% underpinned by: (i) a stronger container volume (+3%), (ii) an improved average revenue per TEU (+1%) backed a better cargo mix with expanding high-margin gateway cargoes, and (iii) a higher storage income ratio of 21.6% in 2QFY24 (vs.18.4% in 2QFY23) thanks to boxes re-routed from the Port of Singapore (which has since eased).

Its gateway container volume (+11%) remained strong on the back of brisk exports by local manufacturers (partly fuelled by the weak MYR). This was partially offset by a 3% decline in the transhipment volume due to: (i) lingering conflicts in the Middle East that weighed down on the Asia-Europe trade, (ii) the disruption in the form of intermittent port congestions (due to vessels bunching, i.e. vessels arriving back-to-back or within a short time interval between each vessel), and (iii) the cessation of operations in Malaysia of a shipping liner on Malaysia’s docking ban on Israel-flagged ships.

On the other hand, its conventional cargo volume improved to 5.68m metric tonnes (+5%) on higher volume of break bulk throughput (ingots, coils, mixed steel and rubber) in 2QFY24.

Its core net profit grew by a sharper 8% due to a better mix skewed towards higher-margin gateway cargoes and lower finance cost (-4%).,

QoQ, its 2QFY24 revenue rose 2% on seasonally stronger transhipment volume throughput (+3%), partially mitigated by weaker gateway volume (-1%) due to reduced cargoes volume from China, and flat average revenue per TEU. However, its core net profit was flat on a reduced higher-margin gateway cargo volume as well as reduced efficiency arising from container yard congestion.

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 prolonged conflicts in the Middle East 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 arriving back-to-back or within a short time interval between each vessel). The container yard utilisation eased to 85% in July 2024 compared to 100% in Jun 2024, which it expects to ease further in Aug 2024. The yard congestion in Jun 2024 was due to containers boxes re-routed from the Port of Singapore (heading to the Port of Bangladesh which was also congested). Nevertheless, it remains optimistic that the port congestion is manageable.

3. Meanwhile, the approval for container tariff revision and the Westports 2 (WP2) expansion project is still pending (expecting to be concluded by end-2024, implementation by 2026, though could potentially be delayed). On the other hand, the new RM5b Sukuk Wakalah programme has now been put in place with initial drawdown of RM355m in May 2024, mainly to refinance Marina land acquisition (RM423m). 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 valuations have become unattractive after the recent run-up in its share price, and its earnings risk remain elevated on the prolonged conflicts in Middle East. Maintain UNDERPERFORM.

Risks to our call include: (i) a significant pickup in the global economy, boosting the global containerised trade traffic, (ii) de-escalation in Middle East conflicts; (iii) operating costs turn more benign, particularly fuel, and (iii) its expansion plans and tariff revision materialise sooner than expected.

Source: Kenanga Research - 30 Jul 2024