Review

• Westports’ 3Q19 results came in below our expectation but within consensus estimates. Its 9M19 core profit of RM465.5mn accounted for 62% of our full-year forecast and the variance was mainly due to lowerthan-expected charges for container handling services.

• 9M19 core profit surged 21.4% YoY to RM465.5mn, driven by higher revenue and margin expansion. 9M19 revenue increased by 11.1% YoY to RM1.3bn while the adjusted PBT margin inched up to 35% from 32% the same period last year. All of these were resulted from: 1) higher container throughput, where transhipment volume surged by 20% to 5.4mn TEUs and gateway volume expanded by 8% to 2.65mn TEUs (Figure 1); and 2) higher operating efficiency.

• Despite a tariff hike effective Mar-19, it is worth noting that the growth in 9M19 container revenue of 15% was a tad lower than the throughput volume growth of 16%. Management attributed this to the decline in value-added services this year. However, we believe the growth in transhipment was at the expense of lower container handling charges.

• Net gearing improved further to 0.33x as at Sep-19 versus 0.57x a year ago (0.36x in June-19). The improvement was partly due to sharp decline in capex this year besides strong earnings. Note that after spending some RM210mn capex for the development of CT9 last year, 9M19 capex has reduced significantly to RM55.0mn.

Impact

• We cut our FY19/20/21 earnings projections lower by 12.8-13.4% after trimming FY19 container handling charges lower by 10% for transhipment volume.

Conference call takeaways

• The 20.0% growth in transhipment volume for 9M19 was underpinned by 4 additional services from Ocean Alliance this year. In terms of trade lanes, intra-Asia and Asia-Europe growth remained strong at 15% and 32%, respectively compared to 24% and 47% in 2Q19 (Figure 4). IntraAsia volume continued to dominate with 63% share of Westports’ total throughput in 3Q19, followed by Asia-Europe’s 17%. Meanwhile, AsiaAmerica growth contracted for 3 consecutive quarters by 27% in 3Q19

• The development of Westports 2.0, i.e. proposed new container terminal CT10 to CT17, the group has completed technical studies and the environmental impact assessment as well as the layout of Westports 2.0 (Figure 5). However, the negotiation with the government on concession terms is still on-going. According to management, Phase 1 of the project will comprise land reclamation works for CT10-13, which are expected to begin in 1H20. In terms of project costing, it is estimated to cost roughly RM1.0bn to complete the land reclamation works (phase 1) in two years.

• In a more immediate term, the spending of capex will be directed towards CT9, by adding new cranes and terminal trucks (RM400-500mn), to raise Westports’ total capacity to 15.5mn TEUs by end 2020. Also, some capex (RM70mn) would be needed for the construction of a new liquid bulk jetty next year.

• With regards to funding, management does not rule out the equity fund raising possibility in the future besides other funding options such as perpetual debts and dividend reinvestments. In fact, equity fund raising is highly likely for land reclamation works or works that do not generate any income.

Valuation

• Despite lowering our profit projections, we raise Westports’ DDM valuation to RM3.87/share (from RM3.84/share previously) after revising our throughput growth assumptions for future years. In specific, we now assume a 3% constant growth (vs. 1% previously) in throughput from 2020 to 2031. By then, Westports’ total throughput is expected to reach 15mn TEUs (vs. 12.8mn TEUs in previous forecast) or 97% of its capacity (vs. 83%). We assume no growth beyond 2031.

• Our valuation has omitted potential earnings from Westports 2.0, pending finalisation of concession terms and funding options. In terms of stock recommendation, we reiterate our Sell recommendation in light of the global trade tension.

Source: TA Research - 6 Nov 2019