INVESTMENT HIGHLIGHTS

• FY18 earnings in line with ours and consensus estimates, supported by higher throughput volume

• Gateway segment contributed to bulk of overall container volume growth

• Higher mix of gateway volume to improve the yield

• Declared second interim dividend of 6.33sen in 2HFY18

• Upgrade to BUY with an adjusted TP of RM4.01 per share

4QFY18 was the strongest quarter. Westports’ 4QFY18 was the best performing quarter in FY18 with normalised earnings of RM151.3m, representing an increase of +8.6%qoq. This brings the cumulative normalised FY18 earnings to RM534.5m (excluding one-off items), in line with both ours and consensus expectations at 98.0%. The -17.4%yoy decline in FY18 normalised earnings was mainly attributable to the: (i) higher effective tax rate in absence of the Investment Tax Allowance (ITA); (ii) the rise in fuel costs (+26.0%yoy) and; (iii) higher finance costs (+19.6%yoy). Excluding the impact of ITA in FY17, Westports would have recorded a +4.0%yoy in FY18 normalised earnings.

Overall FY18 container throughput volume within expectations. Westports’ FY18 total container throughput increased by +5.6%yoy to 9.5m TEUs, making up 99.1% of our full year estimates. Bulk of the growth was driven by gateway volumes which soared by +17.4%yoy to 3.3m TEUs in view of: (i) returning customers from Northport to Westports and (ii) resilient external trade growth of +6.7%yoy.

Commendable 2HFY18 transhipment volumes. Meanwhile, growth in the transhipment volume was flat as the +15.0%yoy growth in 2HFY18 made up for the -13.0%yoy drop seen in 1HFY18. Factors that boosted 2HFY18 transhipment volumes include: (i) accelerated shipments towards the end of year as the Lunar New Year takes place earlier in FY19 and (ii) fading effects from the reshuffling of shipping alliances.

Yields to be relieved by more gateway volumes. The ratio of gateway to transhipment volume as of end 2018 improved to 35:65 as compared to 31:69 in FY17. This provides some relief as yields for gateway cargo are higher than that of transhipment at an estimated premium of more than 30%. Moreover, gateway volumes will experience immediate effects from the scheduled March 2019 tariff hike compared to transhipment volumes which are based on long term fixed contracts.

Dividends. Westports announced a second interim dividend of 6.33sen per share (ex-date 18 February 2019). This brings the full year FY18 dividend to 11.73 sen per share, in line with its 75% dividend payout policy but was lower than FY17 dividend of 14.3sen per share.

Looking ahead. FY19 is set to be a year of organic growth in terms of container volume as the effects from the recalibration of shipping alliances is overdone. To recall, in 2018, ASEAN contributed 27.1% of total Malaysian trade, higher than that of U.S and China. Therefore, we are maintaining our 9.9m TEUs target for FY19, reflecting a +3.4%yoy growth which is in-line with the management’s guidance of three to eight per cent. Note that our FY19 container volume growth estimates commensurate with MIDF Research’s economics team estimates of a +3.6%yoy total exports growth in FY19.

Updates on ‘Westports 2’. Management noted that feasibility studies for the CT10-CT19 expansion is expected to be completed by end of 1QFY19. Following that, Westports will start negotiations with the Government of Malaysia (GoM) for the concession agreement. We are confident that it will be granted given that the expansion will be fully funded by Westports. Assuming that the concession with the GoM is concluded by the end of FY19, we expect the land reclamation works to begin in FY20 after the second land acquisition is made.

Impact on earnings. As we impute full FY18 figures and carry out other housekeeping tasks, our FY19F earnings estimates are slightly adjusted upwards marginally by less than one percent to RM595.0m. We also introduce our FY20F earnings forecasts of RM669.9m.

Upgrade to BUY with an adjusted TP of RM4.01 per share (previously RM3.62 per share) based on DCF valuation (terminal growth: 3.0%, WACC: 8.5%) as we roll our valuation base forward to FY20 and impute higher earnings growth from FY20 onwards in our model amidst commendable container throughput moving forward. We favour Westports due to: (i) lower transhipment tariffs amongst its peers such as Port of Tanjung Pelepas and Port of Singapore even after taking into account of the second phase of tariff hike in March 2019; and (ii) the extension of the Ocean Alliance to 10 years (initially 5 years) until 2027 will deter effects from the reshuffling of alliances profoundly seen in FY17. On a longer term horizon, Westport’s CT10-CT19 expansion plan is expected to increase capacity by roughly 50% to approximately 30m TEUs per annum by 2040. This would allow Westports’ to compete more effectively for transhipment volumes against Ports of Singapore which has plans to raise capacity from to 65m TEU by 2040.

Source: MIDF Research - 31 Jan 2019