Review

• Stripping off investment gains and other exceptional items of RM4.5mn, Westports’ FY16 core profit of RM632.4mn was within expectation at 2% above ours and consensus forecasts. For this quarter, the company proposed a second interim dividend of 6.7sen/share, bringing the total dividend to 14sen/share for FY16, a tad higher than our forecast of 13.6sen/share.

• Another strong quarter for transshipment growth (+9.2% YoY) in 4Q16, thanks to some ad-hoc volume from Asia-Europe trade lane (see Chart 4). Also, management guided that an early Chinese New Year in 2017 contributed to higher trade volume too in 4Q16, especially Intra-Asia trade lane. All of these, coupled with the investment tax allowance which reduced 4Q16 tax by 42.9% YoY, led to higher core profit of 18.2%. For full-year FY16, core profit increased by 23.7% YoY due to higher transshipment volume (12.5%), increase in tariff and the investment tax allowance.

• Westports’ net gearing stood at 0.35x in 4Q16 compared to 0.4x a year ago. Over the year, the group spent capex of approximately RM490mn on CT8 construction, leading to 9% increase in the group’s long term concession and port assets. The construction cost was financed via internally generated funds and the total borrowings was unchanged at RM1.15bn in FY16.

Impact

• We adjust our FY17-18 earnings projections by +0.1% and -13.9% respectively after bringing forward the capex for CT9 construction to FY17, resulting in higher investment tax allowance for FY17 and lower for FY18. We also incorporate the latest unaudited FY16 earnings into our forecasts.

Analyst briefing – Key takeaways

• In relation to formation of new alliances, there is still lack of clarity on the potential throughput that will come to Port Klang. However, as both Ocean Alliance and THE Alliance will commence operation in April-17, management believes that 1Q17 throughput is expected to be as strong as 4Q16 and 2Q17 should see the volume pick up due to phase-in phase-out boxes post commencement of new alliance. 3Q17 volume is expected to moderate sequentially and 4Q17 volume is expected to contract YoY.

• Phase 2 of CT8 is expected to commence operation by mid-17 and this is expected to boost the total capacity to 13.5mn TEUs. For phase 1 CT9, the group will construct a 600m wharf and some port equipment. The construction is expected to complete by end-17. The estimated capex of RM545mn for CT9 would be funded mainly by internally generated funds and short term borrowings.

• In the case where lesser vessels are called after the new alliances are formed, the group will continue with the construction of the new wharf but may delay orders of port cranes. This is to ensure the group can reap the full benefit of the investment tax allowance, which will expire in FY18
   
• Meanwhile, we concur with management that CT9 expedition is necessary to prove its ability to handle more cargoes for new shipping alliances, aside from the tax benefits.
   
• We understand from management that the construction of new port at Carey Island, which can handle up to 30mn TUEs, is expected to be costly and full of challenges due to the absence of natural breakwater. Government’s supports in terms of subsidies, concession and tariff, would be needed to finance this massive infrastructure of more than RM200bn. Given the complexity of the project, we believe the proposed Carey Island port would not pose immediate threats to Westports for the next 5 years at least.

Valuation

• Given the change in earnings forecast, we cut Westports’ DDM-valuation to RM4.58/share (from RM4.82/share previously) based on unchanged discount rate of 6.5%. Maintain Hold on Westports until the uncertainty arising from new alliance formation dissipated.

Source: TA Research - 13 Feb 2017