• Still NEUTRAL, with new DCF-derived MYR3.74 TP from MYR3.65, 9.6% upside, c.5% yield. We expect Westports’ 3Q23 earnings to fall within the range of MYR150-160m (softer QoQ and flattish YoY), on the back of flattish container volume growth and normalised VAS contributions. Our FY23 container assumptions still stand at 10.45m TEUs (4% YoY growth). There is a possibility of Westports being removed from the FBM KLCI list in the upcoming semi-annual review (cut-off date: 20 November).

• 3Q23 results preview. We expect 3Q23 container volume growth to remain stable YoY, staying within the 2-2.5m TEUs range. This is due to a high base effect and lower empty container ratio, as the majority of containers have been repositioned back to China in 1H23. The container mix for transhipments and gateway should remain at c.60%/40%. We expect VAS contribution to remain constant QoQ because of normalised rates, but lower YoY due to its high base in 3Q22. We expect an opex increase, primarily driven by higher labour costs and a surge in imbalance cost pass-through – may be partially mitigated by a decrease in fuel costs. The opex breakdown for labour, electricity, and fuel was 34%/7%/18% in 1H23. Hence, we estimate a 3Q23 core net profit within the range of MYR150-160m, flattish YoY.

• Westports 2 to commence in 2024. The group received cabinet approval in August to expand its container terminals (CT) to 17. This has been reduced from the initial proposal of 19 CTs, due to various complications and high costs. Westports is currently operating nine container terminals with an annual capacity of 14m TEUs. The expansion is set to double its annual TEUs to 27m over a projected 20-year period. The first phase, involving CT 10-13, will commence after the land reclamation process – estimated to take around two years, according to the group.

• Outlook. RHB Economics anticipates a continued contraction for export data (YoY) in 4Q23, and maintains its full-year FY23 export projection at -9.4% YoY. A more robust recovery is expected in 1H24, supported by the resilience of the US and ASEAN economies, the recovery of the global technology cycle, and China's economic growth – with early signs indicating improvements in consumer spending and industrial activities in the East Asian nation. Note that US/ASEAN/China constitute c.11%/28%/13% of Malaysia’s total exports.

• Valuation. We roll forward the valuation year to FY24 while keeping estimates unchanged. Our DCF-derived TP is now MYR3.74, after incorporating a 0% ESG premium/discount, based on its ESG score of 3.0. We maintain our NEUTRAL call as Westports is currently fairly valued, with an implied FY24 P/E of 16.2x – closely aligned with its historical average of 16.8x and that of regional peers at 17.4x. Key downside risks are lowerthan-expected TEU volume, and higher-than-expected operating costs. The opposite represents upside risks.

Source: RHB Securities Research - 31 Oct 2023