INVESTMENT HIGHLIGHTS

• A decline in 2QFY17 transhipment volume likely

• Growth was hinged on 2QFY17 doing well

• Timing of vessel calls a temporary setback for 2QFY17

• Positively, gateway cargo recorded an increase

• We are revising down our earnings forecasts

• Downgrade to NEUTRAL with lower TP of RM 3.98 (from: RM5.00)

A decline in 2QFY17 transhipment volume likely. The management of Westports held a conference call, during which they provided updates on a fall in transhipment volume in the months of April and May. We assess that transhipment volume could have fallen between 10% and 11% during that period, possibly leading to a -3%yoy decline in 1HFY17 overall container volume, a negative surprise. Consequently, the management have also revised their FY17 container throughput forecast from flat growth to a single-digit decline.

Hopes of growth were pinned on 2QFY17. Initial forecasts suggested 2QFY17 as being a quarter where Westports could capitalise on ad-hoc calls to register a growth in volume, following the formation of the new shipping alliances. This has not panned out as earlier envisaged, as there was strong competition in the form of hefty discounts from Chinese ports, who vied for the same ad-hoc containers.

Unfortuitous timing in vessel sailings. Exacerbating matters, the majority of calls allocated to Westports by the Ocean Alliance are Eastbound backhaul voyages. This caused a void in vessel calls in April, as the new alliance’s container vessels had only begun sailing West-bound to complete the western legs of their voyages.

On the bright side…The gateway cargo segment could have grown at a stronger pace, which we estimate at 4-5% in April and May, partially cushioning the blow from the drop in transhipment cargo. This provides some relief as yields for gateway cargo are significantly higher than that of transhipment, a premium which we estimate at 75%.

We are revising down our earnings forecasts for both FY17 and FY18 by -16% as we now assume a -4%yoy decline in transhipment volume (from: +5%yoy growth). Our gateway volume growth forecast remains unchanged at +4%yoy for FY17.

We downgrade Westports to NEUTRAL with reduced TP of RM3.98 based on DCF valuation (terminal growth: 2.5%, WACC: 8.5%). The formation of the Ocean Alliance, while larger than the O3 Alliance in capacity is adopting a dual-hub strategy in the Straits of Malacca (previously: single hub at Westports), causing Westports to cede a portion of its transhipment cargo to PSA. That said, Westports offers one of the cheapest container handling tariffs on the Strait. Coupled with its expansion initiative of CT8 phase 2 and CT9 phase 1, Westports stands a fair chance of regaining some of its losses in volume as it improves its container handling efficiency.

Source: MIDF Research - 2 Jun 2017