INVESTMENT HIGHLIGHTS

• 1HFY19 results within estimates

• Gateway volumes soared to another record high in 2QFY19

• More headroom for growth in 2HFY19 despite normalisation of container throughput

• Revising earnings forecast upwards

• Maintain BUY with a revised TP of RM4.27 per share

1HFY19 earnings within estimates. Westports reported a 1HFY19 normalised PAT of RM306.6m (+25.6%yoy) which was within ours and consensus’s expectations, accounting for 51.5% and 50.3% of full year forecasts respectively. The growth in earnings was partly attributable to the reduction in finance costs by -3.0%yoy and the four-month effect of the container tariff hike effective from 1 March 2019.

Gateway volumes soared to another record high. The total container throughput in 1HFY19 grew by +17.1% to reach 5.26m TEUs, cancelling out the -3.6%yoy decline seen a year ago. Bulk of the growth came from transhipment throughput which soared +21.6%yoy to hit 1.83m TEUs in 1HFY19. This was underpinned by stronger contribution not just from the intra-Asia but also Asia-Europe trade lanes following the addition of services through the Ocean Alliance. Meanwhile gateway throughput grew at a tune of +8.9%yoy in 1HFY19 compared to the +20.0%yoy growth in 1HFY18. The tapering growth in gateway throughput was mainly due to the high base achieved last year with volumes remaining above 0.75m TEUs since 4QFY17. Nevertheless, it was notable that the gateway volume notched a record high of 0.90m TEUs in 2QFY19.

Gateway to transhipment ratio still commendable. The ratio of gateway to transhipment volume as of 30th June 2019 stood at 33:67 which is still commendable. This provides some buffer for the company’s earnings as yields for gateway cargo are higher than that of transhipment.

Moving forward. We note that Westports’ total container throughput in 1HFY19 broadly met our expectations, making up 52.5% of our full year forecast. Nevertheless, we opine that there is still more headroom for growth in container throughput for 2HFY19 notwithstanding the normalisation of container throughput as the reshuffling of shipping alliances is done. This is predicated by resilient demand in both China and the U.S (indicated by retail sales and business confidence despite the ongoing trade tensions between both nations). Such trade disputes may continue prompting companies especially in China to relocate their business hubs to ASEAN, benefitting countries such as Malaysia.

Intra-Asia continues to be bellwether for growth. For the first five-months of 2019, ASEAN was the biggest contributor to Malaysia’s total trade at 27.1%, compared to U.S and China More importantly, the percentage of contribution from ASEAN, U.S and China have been increasing thus far this year despite the occurrence of the U.SChina trade war (refer Table 1). Taking all of these into consideration, we have revised container throughput growth in FY19 to 7.5% (previously 3.4%). Our container throughput growth estimates are also in line with management’s guidance of a high single digit growth for FY19.

Update on expansion plans. For ‘Westports 2’ expansion plans, we understand that it has been scaled down from 10 to 8 container terminals after taking into dredging and reclamation costs totalling to roughly RM1.0b (spread over two to three years). Recall that the feasibility studies were completed in 1QFY19 and the design is expected to be completed by 3QFY19, whereby Westports will be able to begin negotiating the new concession terms for Westports 2. Dredging works are expected to commence in mid-1QFY20 provided that the agreement has been signed. Westports also guided that funding will likely be via a dividend reinvestment plan instead of borrowings alone. In the near term, the company also envisaged the need for CT 9 Phase 2 to occur in FY20 as management guided that utilisation rates are hovering around 75%, the level in which to consider building a new container terminal with capex of circa RM400m. Such capex assumptions have already been imputed into our model accordingly.

Earnings adjustment amidst more headroom growth. We are adjusting our earnings forecast for FY19F/FY20F by +2.9%/+1.3% as we factor in higher container throughput growth.

Target price. Following the upward revision in our earnings forecast, our target price based on our DCF valuation (terminal growth: 3.0%, WACC:7.5%) has been revised to RM4.27 per share (RM4.09 previously)

Maintain BUY. 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 mitigate the effects from the reshuffling of alliances profoundly seen in FY17. Contribution from intra-Asia trade lanes will continue to remain robust underpinned by ASEAN’s economic growth of 5.0% in 2019 based on IMF’s latest projections. On a longer term horizon, ‘Westport 2’ expansion plan is still 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 around 40m TEUs to 65m TEUs by 2040.

Source: MIDF Research - 29 Jul 2019