INVESTMENT HIGHLIGHTS

• CT8 investment tax allowances yet to kick in

• 17 consecutive quarters of container throughput growth

• Gateway cargo recovering in tandem with external trade

• CT8 phase 2 and CT9 phase 1 expansion is on track

• Maintain BUY with unchanged TP of RM5.00

CT8 investment tax allowances yet to kick in. Westports recorded a first quarter core PAT of RM151m (-6%yoy) which fell short of our expectations, representing 20% of our full year forecasts. The shortfall was to a large extent attributed to a higher than expected effective tax rate of 21% due to the capitalisation of CT8 and CT9 capex which would materialise in the coming quarters.

17 consecutive quarters of container throughput growth. While only marginal at +1%yoy, it was nonetheless not an easy accomplishment considering rival ports have seen occasional declines. Westports also had to contend with one fewer day in 1QFY17 compared to 1QFY16 which was a leap year, effectively shaving off 1% of growth.

Despite various challenges, there are still bright spots in Westports’ outlook:

i. Management highlighted that they are seeing a pickup in highyielding laden gateway cargo, underpinned by stronger domestic consumption and external trade.

ii. Westports will likely handle a higher volume of ad hoc containers in 2QFY17 arising from realignments by the new shipping alliances. While Chinese ports are giving discounts to entice alliances to conduct their realignments there, we understand ports such as Shanghai are currently facing severe congestion issues.

iii. Further on the shipping alliances, new long haul services by new members Evergreen and OOCL could offset some of the losses from CMA.

iv. Meanwhile, UASC will maintain non-alliance services with Westports despite being acquired by Maersk.

v. Operating costs, namely marine and diesel costs would have likely peaked in 1QFY17 and trend lower in the coming quarters.

Expansion is on track. Westports has budgeted a record RM851m on capex in FY17 which would raise its container handling capacity by +14%yoy from 12.25m TEU to 14m TEU by year’s end. The expansion would help ease the utilisation rate of its container handling capacity which averaged at 86% in FY16 (peaked at 94%). This would in turn allow Westports to compete for transhipment business more effectively.

We maintain our BUY call on WPRTS with TP of RM5.00 based on DCF valuation (terminal growth: 2%, WACC: 7%). We are comfortable with WPRTS trading at a forward FY17 price-to-earnings ratio of 19.8x given its consistency in achieving 1) high ROE of 32%, 2) dividend yield of 3.7% and 3) net profit margin of 36%. We perceive the current uncertainty pertaining to the direction of the Ocean Alliance as a buying opportunity, with growth resuming once recalibrations are complete.

Source: MIDF Research - 28 Apr 2017