KEY INVESTMENT HIGHLIGHTS

• 9MFY20 core PAT grew at +10.0%yoy to RM514.2m

• Lower container volume yet higher top line. Added contribution of Value Added Services (VAS) business such as reefer storage

• Management is expecting a low single digit decline in terms of overall container throughput this year

• We revise our FY20 PAT estimates to RM664.0m, translated to +12.1% increase

• Maintain NEUTRAL with a revised TP of RM4.20 per share

Above expectation. Westports recorded a 3QFY20 core PAT of RM203.9m (+44.3%qoq and +26.a%yoy) on the back of higher revenue recorded at RM528.4m (+22.4%qoq and +14.8%yoy). Cumulatively, its 9MFY20 core PAT grew at +10.0%yoy to RM514.2m. This came in as a positive surprise as earnings deviated from ours and consensus expectation by +13.1% and +10.0% respectively.

Lower container volume yet higher top line. Westports saw a decline of -4.0%yoy for TEU’s volume as of 9MFY20 in comparison with the corresponding period in FY19 (TEU: 7.73m vs 8.04m). Despite the slight decrease in container throughput, the segment managed to record higher revenue at RM441.0m (+24.2%qoq and +10.5%yoy). This is primarily attributable to the added contribution of Value Added Services (VAS) business such as reefer storage and increase in local volume mix (higher gateway TEUs).

Cost savings. Based on management’s disclosure, the group saw - 5.0% decline during the quarter in operational cost driven by saving from lower fuel cost at RM21.0m (-21.0%yoy). On a YTD basis, the group saw a marginal decline in cost at -1.0%yoy. Typically, fuel cost made up circa 13-17% of the group cost of sales. Furthermore, the improvement in operational cost can be attributed to lower dredging cost incurred, estimated circa -31%yoy as the group slated to only kick start major dredging cycle next year. The timeline between dredging cycles is between 18-24 months.

End of year outlook. Management is expecting a low single digit decline in terms of overall container throughput this year, estimated between -3 to -5% (10.31m – 10.53m TEU) in comparison to last year. On yearly basis, CY October saw ~4%yoy growth whereas November slated to show flattish growth in comparison from CY19. So far, the group has shown commendable performance despite disruptions of trade activities earlier this year due to the pandemic.

Tax man comes knocking. Recall that last month; the group has been slapped with additional tax liabilities to the tune of RM120.6m from IRB. Since then, Westport has contested against IRB’s imposition of an additional tax assessment. They are scheduled to appear in court early next year. That said, we opine that the tax liabilities will not have material impact on the group financial performance. Westports has the ability and capacity to settle the tax bill, should they need to. As of 3QFY20, the group’s cash and equivalents stood at circa RM610.6m, or more than 5x of the sum of the additional tax assessment.

Earnings Estimate. Given the commendable performance of the group, we are revising our FY20 PAT estimates to RM664.0m – which translates to +12.1% increases from previous estimate at RM583.8m. However, we are maintaining our earnings forecast for FY21 given that the current increase in revenue is driven by better-than-average contribution from VAS services, among others, which we deemed to be normalized next year due to lesser business disruptions.

Target Price: We are revising our target price to RM4.20 per share (from RM4.03 previously) to account for the increase in our estimates. Our valuation is derived from a discounted cashflow model (DCF) with a cost of capital of 5.6% and terminal growth of 3%.

Maintain NEUTRAL. We opine that all the positives have been priced in at this juncture which we believe will cap both its earnings and share price appreciation going forward. We are maintaining our NEUTRAL call on Westports as the group is trading at slight premium of its average 5 years PER at 22.1x vs. 21.4x, which is mean level. That said, we continue to view Westports positively due to: (i) lower transshipment 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. Nevertheless, the contribution from intra-Asia and Asia-Europe trade lanes may face temporary downward pressure from the coronavirus in FY20.

On a longer term horizon, Westport 2 expansion plan is still expected to increase capacity by approximately 28m TEUs per annum by 2040 from the current ~13-13.5m TEUs. This would allow Westports’ to compete more effectively for transshipment volumes against Ports of Singapore which has plans to raise capacity from around 40m TEUs to 65m TEUs by 2040. Risks to our call include; (i) coronavirus outbreak in the Port Klang and (ii) any abrupt downside revision to port tariffs.

Source: MIDF Research - 27 Nov 2020