Investment Highlights

• 9MFY17 earnings within estimates

• 3QFY17 buoyed by lower costs and gateway contribution

• Effect of reshuffling alliances felt

• 2HFY17 still murky but FY18 will be better

• Maintain NEUTRAL with reduced TP of RM3.87

9MFY17 earnings within estimates. Westports reported 9MFY17 core PAT of RM440.5m (-4.4%yoy) which met both ours and consensus’ expectations, representing 75% of respective full year forecasts.

3QFY17 buoyed by lower costs and gateway cargo. In 3QFY17, revenue was up +3.8%yoy but core PAT fell marginally by -0.4%yoy due to the fall in transhipment throughput volume. The fall in core PAT was cushioned by: i) improvement in gateway cargo contribution where the ratio of gateway to transhipment now stands at 30:70 compared to 26:74 a year ago, ii) lower costs in the container segment that dropped - 19.3%yoy, due to a -13.7%yoy drop in overall container throughput volume, and (iii) lower manpower cost caused by lower overtime claims.

Effect of reshuffling alliances felt. Westports faced setbacks as the new alliances, the Ocean Alliance and THE Alliance commenced. The Ocean Alliance moved their containers to the Port of Singapore (PSA) back in April as its largest member, CMA CGM completed its takeover of Singapore based Neptune Orient Lines (NOL). On the other hand, another of Westports’ largest customers, UASC, did the same as it became a part of THE alliance after being acquired by Hapag-Lloyd. The Asia-Europe and Asia-America trade lanes saw a decrease in container volumes as a result of this. Overall, the transhipment throughput volume recorded a - 23.2%yoy decline which was the second consecutive drop for the year.

Gateway contribution remains positive. Gateway throughput volume on the other hand continued to improve, expanding +14.3%yoy in 3QFY17 (9MFY17:+7.9%yoy) as exports volume surged highest on record, posting +14.2%yoy growth in the third quarter. We remain optimistic on the gateway segment in 2H17 amid the +14.5% growth in gross external trade forecasted by our economics team for FY17.

Tax rate slightly unchanged in 3QFY17. The effective tax rate was slightly unchanged in 3QFY17 at 15.2% (2QFY17: 14.7%, 3QFY16: 15.0%). In spite of this, we note that the tax rate has declined from 21% in 1QFY17 and is expected to decline more in the 4QFY17. This will follow the capitalisation of terminal operating equipment and wharf.

2HFY17 outlook remains murky but FY18 will be better. The management of Westports remains cautious, holding on to an expectation that FY17’s overall container throughput could decline between -7% and -12%yoy, before flattening out in 2QFY18 and returning to growth from 3QFY18 onwards.

Earnings forecast. We are revising down our earnings forecasts slightly for both FY17 and FY18 by -1.5%, following our revision in the forecast for the transhipment volume growth to -8.0%yoy (from -7.0%yoy) in FY17 while our gateway volume forecast remains unchanged at +4%yoy for the same period. Hence, we are forecasting a revised - 4.9%yoy (from -4.2%yoy) decline in overall throughput volume in FY17 amidst the effects of the reshuffling of shipping alliance while maintaining a growth of +7%yoy in FY18.

We are slightly more optimistic. Our forecasted decline in throughput volume is slightly more upbeat compared to management’s view. This hinges on continued strength in external trade and growth in global container shipping demand. Aside 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 reduced TP of RM3.87 based on DCF valuation (terminal growth: 3.0%, 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 following its low berth occupancy low, enabling waiting time to be negligible. The impetus to revise our call would be new updates on the expansion plans for container terminal facilities from CT10 to CT19. For the time being Westports is preparing to undertake feasibility studies for the proposed expansion.

Source: MIDF Research - 13 Nov 2017