INVESTMENT HIGHLIGHTS

• FY17 exceeded our and consensus estimates
• Gateway segment continues to gain volume traction
• Declared second interim dividend of 7.95sen in 2HFY17
• Revising earnings forecast upwards for FY18
• Upgrade to BUY with adjusted TP of RM3.89 per share

Commendable financial performance. Westports’ 4QFY17 was the best performing quarter in FY17 with earnings of RM211.0m, representing growth of +39.9%qoq. This brings the cumulative normalised FY17 earnings to RM645.4m (excluding impairment losses on receivables), exceeding our expectations by a variation of more than >10%. It is noteworthy that the +2.0%yoy increase in earnings was partly due to the claims on Investment Tax Allowance (ITA) coming from the capitalisation of RM812m worth of qualifying capital expenditure.

Overall container throughput volume. Although overall container volume dropped by -9.5%yoy, container revenue only dipped by -6%yoy cushioned by higher gateway volumes that grew by +9.8%yoy. Meanwhile the transhipment volume in FY17 dropped by -16%yoy amidst consolidation among shipping liners and recalibration of new shipping alliances. With that, the ratio of gateway to transhipment volume currently stands at 31:69 compared to 26:74 in FY16. This provides some relief as yields for gateway cargo are higher than that of transhipment at an estimated premium of 60%.

Bill of demands from customs. The bill of demands from the Royal Malaysian Customs (RMC) amounts to RM59.5m. Assuming that Westports loses its appeal to the customs, the payment would not impact the financial health of Westports as it has ample operating cash flow worth RM1.09b as at the end of FY17.

Looking ahead. FY18 is set to be a year of growth in terms of container volume. From 3QFY18 onwards, container volume is expected to stage a rebound due to a low base, signalling a return to normalcy as the impact of the new alliances fades. Management is expecting container volume growth to be within a range of 2-3%. Meanwhile we are slightly more optimistic, maintaining our forecast of a +5.2%yoy increase in throughput volume in FY18. Our more upbeat view hinges on continued strength in Malaysian external trade that is estimated to grow by +9.3%yoy according to our economics team which would bode well for the gateway segment.

Impact on earnings. Taking into consideration: (i) the strength in Malaysia’s external trade; (ii) the tariff hike in September 2018 and; (iii) the increased FY18 tax rate to 24% due to realisation of cash benefits in FY18 as a result of the ITA in FY17, we are adjusting our FY18 earnings forecasts upwards to RM584.6m (previously RM554.9m).

Upgrade to BUY with revised TP of RM3.89 per share based on DCF valuation (terminal growth: 2.0%, WACC: 8.5%). Westports is currently trading at a forward FY18 price-to-earnings ratio of 20.6x which is justified by: (i) a dividend yield of 4.0% and (ii) low net gearing of 0.41x. The completion of CT9 phase 1 increases Westports’ total capacity to 14.0m TEUs. For the CT10-CT19 expansion plans, the company is still carrying out feasibility studies which are expected to conclude by the end of this year. Overall, we favour Westports as its incoming capacity coupled with plans to increase automation in the long run would enable the company to compete for transhipment businesses more effectively.

Source: MIDF Research - 9 Feb 2018