• 1HFY17 earnings within estimates

• 2QFY17 supported by better container mix and lower taxes

• A quarter mired in setbacks with some silver linings

• 2HFY17 still gloomy but FY18 will be better

• Maintain NEUTRAL with unchanged TP of RM3.98

1HFY17 earnings within estimates. Westports reported 1HFY17 core PAT of RM290m (-6.3%yoy) which met both ours and consensus expectations, representing 50% and 48% of forecasts.

2QFY17 supported by better container mix and lower taxes. For the second quarter, revenue and core PAT fell -6.3%yoy and -6.5%yoy respectively. Nevertheless, it was a smaller drop compared to overall container throughput volume that fell -10.8%yoy. Cushioning the fall in revenue and core PAT was better gateway cargo contribution and a lower effective tax rate of 15% (1QFY17: 21%, 2QFY16: 17%).

A quarter mired in setbacks... Westports was dealt an awful hand following the commencement of the new shipping alliances in April 2017 - 1) CMA CGM moved 1m transhipment containers on an annualised basis to the Port of Singapore (PSA), 2) UASC shifted its transhipment containers to PSA after being acquired by Hapag-Lloyd, 3) there was an absence of ad-hoc containers and 4) its services with the Ocean alliance are backhaul voyages, with calls at Westports only beginning in mid-June. As a result, transhipment throughput volume dipped -17.4%yoy in 2QFY17, the first decline in more than four years.

…with some silver linings. On the flipside, Westports benefitted from a timely rebound in exports, translating into a growth of +7.6%yoy in 2QFY17 gateway throughput volume (1HFY17: +4.8%yoy). This bodes well for Westports as gateway cargo have higher tariffs and hence, better yields. We are upbeat on the gateway segment in the second half, underpinned by our house’s forecast of a +14% expansion in gross external trade in 2017. Meanwhile, THE alliance and other members of the Ocean Alliance, comprising of Cosco, Evergreen and OOCL recorded an increase in volumes handled at Westports, albeit being insufficient to match the decline brought from CMA and UASC.2HFY17 still gloomy but FY18 will be better. The management of Westports now believes that FY17’s overall container throughput could decline between -7% and -12%yoy, before flattening out in 1QFY18 and returning to growth from 2QFY18 onwards. We are slightly more optimistic, forecasting a -4.2%yoy decline in throughput volume in FY17 and a growth of +7%yoy in FY18. Our slightly more upbeat view hinges on continued strength in external trade and an improvement in global container shipping demand. Apart from that, Westports could benefit from service updates carried out by shipping alliances, having expanded its container handling capacity via CT8 and CT9 phase 1.

Maintain NEUTRAL with unchanged 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: a single hub at Westports), causing Westports to cede a portion of its transhipment cargo to PSA. In addition, UASC has shifted out its transhipment containers following its acquisition by Hapag-Lloyd. 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 - 21 Jul 2017