KEY INVESTMENT HIGHLIGHTS

• 9MFY19 normalised earnings came within expectations

• No slack in gateway throughput as it soared to another record high in 3QFY19

• Seasonal strength to kick in 4QFY19, giving more upside to container throughput and earnings

• Intra-Asian trade lanes to remain on an upward trajectory

• Revising earnings forecast upwards to take into account of the higher expected container throughput

• Maintain BUY with a revised TP of RM4.82 per share

9MFY19 earnings within estimates. In 3QFY19, normalised earnings of Westports Holdings Berhad (Westports) rose by +14.4%yoy to RM159.3m. This brings Westports’ 9MFY19 normalised earnings to RM465.8m (+21.5%yoy) which met ours and consensus’ full year estimates at 76.0% and 73.7% respectively. The growth in earnings was partly attributable to the reduction in finance costs by -7.5%yoy and the seven-month effect of the container tariff hike effective from 1 March 2019.

Gateway throughput jumps to another record high. Sequentially, container throughput had been gradually increasing for the past three quarters. As such, the total container throughput grew by +15.7%yoy in 9MFY19 to reach 8.04m TEUs, cancelling out the -5.7%yoy decline seen a year ago. Bulk of the growth still came from transhipment throughput which soared +20.0%yoy to hit 5.39m TEUs in 9MFY19. This was underpinned by stronger contribution not just from the intra-Asia segment but also four services under the Ocean Alliance which were rerouted from Singapore to Port Klang. Meanwhile, gateway throughput grew at a tune of +7.8%yoy in 9MFY19 compared to the +20.1%yoy growth in 9MFY18. The tapering growth in gateway throughput was mainly due to the high base achieved last year with volumes remaining above 0.80m TEUs since 2QFY18. Nevertheless, it was notable that the gateway volume notched a new record high of 0.92m TEUs in 3QFY19. This was partially driven by the higher depreciation in Ringgit against USD by 1.28% in 3QFY19 in comparison to regional peers such as Thailand, Vietnam and Taiwan.

Gateway to transhipment ratio still commendable. The ratio of gateway to transhipment volume as of 30th September 2019 remains at 33:67 which was still commendable. This will provide 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 9MFY19 broadly met our expectations, making up 78.5% of our full year forecast. Nevertheless, we opine that there is still more headroom for growth in container throughput in the seasonally strong 4QFY19. It is notable that the contraction in Malaysia’s trade figures for 3QFY19 were caused mainly by E&E exports (-4.9%yoy) which are normally transported via air freight. In contrast, we believe that seaborne trade will remain resilient compared to air trade, in line with DHL’s Global Trade Barometer (refer to Table 1). Moreover on a broader scale, 4QFY19 started on a positive note with Malaysia’s manufacturing Purchasing Managers’ Index climbed to 49.3 in October 2019, the highest in six months partly attributable to trade diversion.

Intra-Asia continues to be bellwether for growth. For the first nine-months of 2019, ASEAN was the biggest contributor to Malaysia’s total trade at 26.6%, compared to U.S and China. More importantly, the percentage of contribution from China towards Malaysia’s trade continues to expand thus far this year (9MFY19:14.6% vs 9MFY18:14.3%) despite the global trade uncertainty. This boosted the growth in contribution from Intra-Asia volume by +7ppts to 19% in 9MFY19 from a year ago. Therefore, we believe that the contribution from intra-Asian trade lanes to remain on an upward trajectory. Taking all of these into consideration, we have revised container throughput growth in FY19 to 13.0% (previously 7.5%) while keeping FY20 unchanged at 4.2%yoy. Our container throughput growth estimates are also in line with management’s guidance of 12.0% to 15.0% growth for FY19 and a 3.0% to 7.0% growth in FY20.

Update on expansion plans. For ‘Westports 2’ expansion plans, management expects to finalise the concession agreement with the Government of Malaysia by 1QCY20 or latest by 2QCY20 before commencing dredging and land reclamation with an estimated capex of RM1.0b (spread over two to three years). Therefore, wharf construction is expected take place in CY21 followed by delivery of cranes towards end of CY22, enabling the operations to begin in CY23. Management also highlighted that funding sources would be a combination of a form of equity raising such as dividend reinvestment plans for phase 1 (covering container terminals 10 to 13) followed by debt financing in the later phases of ‘Westports 2’. A possibility of entering into a joint venture for berths was also highlighted by the company, a similar model seen for MMC Corporation’s Port of Tanjung Pelepas of which 30% is owned by Maersk. As conclusion of the concession terms are still pending, we have yet to impute ‘Westports 2’ into our estimates. In the near term, Westports’ capacity will be increased to 15m TEUs (from 14m TEUs) by end of CY20 via a deployment of five quay cranes and 12 Rubber Tyred Gantry with an estimated capex of RM400m. Apart from that, 100 acres of land has been earmarked for leasing activities to logistics companies mainly involved in the distribution of polymer resin products. Such leasing activities should bode well for cargo generation in addition to other distribution hubs such as IKEA regional distribution which is expected to commence operations in 3QCY20.

Earnings adjustment amidst more headroom growth. We are adjusting our earnings forecast for FY19F/FY20F by +5.8%/+3.3% 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 RM4.82 per share (RM4.27 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 which 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. Further upside on container throughput could come from a potential trade deal between the U.S and China. On a longer term horizon, ‘Westport 2’ expansion plan is still expected to increase capacity by roughly 50% to approximately 28m TEUs per annum by 2040. This would allow Westports’ to compete more effectively for transhipment volumes against Ports of Singapore.

Source: MIDF Research - 6 Nov 2019