Sealing a strong close

Growth track may be bumpy. Westports Holdings (WPRTS) charted a strong FY16 with 22% core net profit growth driven by a surge in transhipment container throughput, plus a lower effective tax rate from its Investment Tax Allowance (ITA). Going forward, although1H17 volume growth is expected to be robust, there is risk of slowdown towards end-2017 from M&A among shipping players. While its long-term prospects remain firm, near-term re-rating may be limited. Maintain HOLD.

More volume volatility in 2017. Container volumes are expected to peak in 2Q17 with the commencement of newly formed alliances, as empty box / ad hoc movements drive up transhipment throughput. However, there is risk of easing volumes from select major clients coming into play near the end of 2017 which may dull or negate full-year growth. We think the uncertainty will hinder a substantial re-rating in the near term, barring upside surprises in 4Q17 volumes which will be indicative of the baseline going forward.

Capacity expansion ambitions on track. In addition to its Container Terminal 8 (CT8) expansion plan, WPRTS is now initiating works for CT9 Phase 1 as well. The capex plan over three years for both will be around RM1bn. Both expansions will increase overall handling capacity to 14m TEUs.

Valuation

Our DCF-based TP is revised to RM4.35 (7.4% WACC) post earnings adjustments. Our TP implies 24x FY17F P/E.

Key Risks to Our View

Deterioration in container volumes. The key concern is a decline in container volumes in the event of worsening economic and trade conditions or an adverse reshuffling of shipping alliances. This will impact earnings and valuations.

Source: Alliance Research - 13 Feb 2017