FY15 core earnings were in line with our/consensus estimates, making up 96%/98%. Maintain BUY with a revised MYR4.66 TP (from MYR4.77, 18% upside) after adjusting our earnings downward by 5-6% for FY16/FY17.Despite anticipating a slowdown in volume growth in view of the challenging macroeconomic environment, we expect Westports’ earnings to be lifted by the gateway tariff hike’s full-year implementation andsuccessful investment tax allowance extension for FY15-17.

Met expectations. Westports’ FY15’s MYR511m core earnings (-2.8% YoY) were broadly in line with our and consensus expectations at 96% and 98% respectively. While operating revenue increased by only 5% in FY15, its PBT registered 12% growth. We attribute this to the increased economies of scale as more boxes were handled, as well as favourable operational cost during the period (fuel cost declined by c.26%). A 5.78 sen DPS was announced (FY15full-year DPS: 11.1 sen).

Volume still growing. FY15 was a record year for Westports in terms of container throughput handled, of which overall volume increased by 8% to 9.05m 20ft equivalent units (TEUs). While the intra-Asia trade lane saw flattish growth, the Asia-America trade lane posted strongest growth during the year. This was underpinned by increased number of services offered by the shipping liners. Nonetheless, management guided for volume growth to slow down to 3-5% in FY16 in view of the challenging global economic and trade outlook.

Earnings growth in FY16. Despite challenging throughput outlook in FY16 andan anticipated slowdown in volume growth, we expect earnings growth to be delivered by: i) full impact of the gateway tariff hike (+15%) that only took effect in Nov 2015, ii) increased economies of scale and favourable operational coststo improve margins, and iii) recent investment tax allowance approval for FY15-17 (effective tax rate: c.15-16% vs 22% in FY15).

Earnings forecasts and risks. We lower our earnings forecast by 5-6% forFY16/FY17 while introducing our FY18’s numbers after making adjustments to:i) FY15’s full-year numbers, ii) slower volume growth of 4-5% to be more in line with management’s guidance, and iii) lower effective tax rate of 16% for FY16 and FY17. The key risk is volume contraction caused by a further global economic slowdown.

Maintain BUY. Post earnings revision, our DCF-derived TP is adjusted to MYR4.66, which implies 17x 2016F EV/EBITDA. We like Westports given its earnings defensiveness. This is coupled with commendable growth prospectsaside from its solid fundamentals, evidenced by its high ROEs underpinned by its efficiency in utilising its assets and superior EBITDA margins vs regional peers

Briefing Highlights Outcome from the recent shipping mergers still in the balance. In view of the recent round of mergers between shipping liners, namely: i) CMA-CGM and Neptune Orient Line (NOL) (NOL SP, NR), and ii) China Shipping Container Line (CSCL) (2866 HK, NR) and China Cosco (COSCO) (1919 HK, NR), a lot of uncertainties revolve around what is tohappen to the shipping alliances and, ultimately, their impact on Westports’ container volume. Management is of the view that it is to be business as usual for 2016, of which thetwo enlarged entities would continue to utilise both Westports and Port of Singapore as their transshipment hubs. This is because the Ocean Three (O3) and CKYHE alliances’agreements would only lapse in 2017.

What is to happen post the expiration of the alliances remain unknown at this juncture. To date, CMA-CGM has indicated that NOL would be joining the O3 alliance upon completion of the merger, while also keen on having a dual hub in both Westports and PSA. This was because the enlarged volume would be too big for one port to handle. On the other hand,CSCL-COSCO have yet to make their intentions clear on their future in the O3 alliance. On this note, we believe the prospect of CSCL-COSCO leaving the O3 alliance remains a high possibility. We estimate that in the worst case scenario of Westports losing all its CSCL-COSCO’s volume, our FY17 earnings forecast would be reduced by 5%. We have not factored in the numbers into our earnings yet.

Nonetheless, management is of the view that, should CSCL-COSCO leave the O3 alliance in 2017, it believes that CMA-CGM would court a new partner to replace CSCL in the alliance. However, the net impact on volume is unclear, as it would depend on who the new partner is.

Successful extension of the investment tax allowance. Westports has announced that it has successfully extended its investment tax allowance for three years commencing from 2015. We believe this is good news for Westports, which is currently in the midst of heavy capex spending for its Container Terminal 8 (CT8) expansion plan that is now heavy loaded in FY16. Management further guided that the effective tax rate for FY16-17 would be around 15-16% when compared to 22% in FY15.