WPRTS's 9MFY24 results beat expectations. Its 9MFY24 core net profit grew 12% YoY driven by marginal increase in container volume with better yield from gateway cargoes, and lower operating costs. It expects a better year ahead on easing of the Middle East conflicts, new shipping service to Premier Alliance, and container volume frontloading activities on the possible tariff hike under the in-coming Trump administration. We raise our FY24F and FY25F net profit forecasts by 6% and 4%, respectively, lift our DCF-derived TP by 9% to RM4.15 (from RM3.80), and upgrade our call to MARKET PERFORM from UNDERPERFORM call. We believe that its risk and reward appear balanced now as share price has declined more than 10% from the peak.

Its 9MFY24 core net profit exceeded expectations at 80% and 77% of our full-year forecast and the full-year consensus estimate, respectively.

The variance against our forecast arose largely from lower-than- expected operating costs with recognition of lower depreciation cost under longer concession period starting 1st September 2024 YoY, its 9MFY24 revenue rose 4% underpinned by: (i) marginal increase in container volume (+1%), (ii) an improved average revenue per TEU (+3%) backed by better cargo mix with expanding high-margin gateway cargoes, and (iii) a higher storage income ratio of 24.6% in 3QFY24 (vs. 21.6% in 2QFY24) thanks to boxes re-routed from the Port of Singapore (which has since eased in 4Q).

Its gateway container volume (+10%) remained strong on the back of brisk exports by local manufacturers (partly fuelled by the weak MYR).

This was partially offset by a 5% decline in the transhipment volume due to: (i) lingering conflicts in the Middle East that weighed down on the Asia-Europe trade, (ii) the disruption in the form of intermittent port congestions (due to vessels bunching, i.e. vessels arriving back-to-back or within a short time interval between each vessel), and (iii) the cessation of local operations of a shipping liner on Malaysia's docking ban on Israel-flagged ships.

On the other hand, its conventional cargo volume improved to 9.02m metric tonnes (+11%) on higher volume of dry bulk throughput (soybean, maize, clinker/slag) and break-bulk throughput (aluminium ingot and project cargo) Its core net profit grew by a sharper 12% due to a better mix skewed towards higher-margin gateway cargoes, lower operating costs from significant reduction in depreciation cost (-10%) in line with the extended useful life of existing concession assets from 2054 to 2070 under the new concession agreement and lower fuel costs (-16%) due to a lower MOPS price as well as stronger MYR in 3QFY24.

QoQ, its 3QFY24 revenue rose 4% despite weaker total container growth (-1%) as value-added services (VAS) revenue increased by +47%, driven by higher reefer units and higher storage income ratio of 24.6% in 3QFY24 (vs. 21.6% in 2QFY24) thanks to re-routing of boxes from the Port of Singapore. Its core net profit grew by a sharper 12% due to reasons as mentioned above.

The key takeaways from the results briefing are as follows:

1. It downgraded its guidance to flattish (from a low single-digit) container volume growth rate in FY24 (vs. our assumption of 1%) as it believes prolonged conflicts in the Middle East will continue to weigh down on the Asia-Europe trade, and the impact of cessation of operations in Malaysia of a shipping liner on Malaysia's docking ban on Israel-flagged ships was larger than expected. Nonetheless, it is slightly more positive on FY25, guiding for a single-digit container volume growth rate (vs. our assumption of 4%). It will embark a new shipping service to the US for the new Premier Alliance (80% transhipments: 20% gateway cargoes) in FY25 with expectation of easing in the Middle East conflicts. It also expects container volume frontloading activities on the possible tariff hike under the Trump administration.
2. The diversion of shipping liners from Suez Canal to the Cape of Good Hope has resulted in intermittent port congestion due to vessels bunching (vessels arriving back-to-back or within a short time interval between each vessel). The container yard utilisation eased to 80% in October 2024 compared to 100% in Jun 2024, which it expects to ease further in December 2024. The yard congestion in Jun 2024 was due to containers boxes being re-routed from the Port of Singapore (heading to the Port of Bangladesh which was also congested). Nevertheless, it remains optimistic that the port congestion is manageable and intend to do detailed analysis for the re-routed container boxes before receiving them.
3. After 1st September 2024, depreciation and amortisation have been extended over the longer concession period, while rental income from land and buildings is recognised on a straight-line basis over the lease term. In 3QFY24, there were revised payments to Port Klang Authority (fixed and variable leases). Meanwhile, the approval for container tariff revision is still pending (expecting to be concluded by mid-2025, implementation by 2026, though could potentially be delayed). On the other hand, the new RM5b Sukuk Wakalah programme has now been put in place with initial drawdown of RM355m in May 2024, mainly to refinance Marina land acquisition (RM423m). It expects slight increases in its finance cost (from the initial drawdown of the sukuk), fuel bills (elevated diesel price which is unsubsidised) and minimum wages revision (its internal minimum wages at RM1,700, to be increased to RM1,900).

Forecasts. We raised FY24 and FY25 net profit forecasts by 6% and 4%, respectively, to reflect the lower-than-expected operating costs from the significant reduction in depreciation cost for the longer concession period.

Valuations. Correspondingly, we upgrade our DCF-derived TP by 9% to RM4.15 (from RM3.80) which is based on a discount rate equivalent to its WACC of 6.1% and a terminal growth rate of 2%. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like WPRTS for: (i) its resilient earnings underpinned by long-term contracts with key clients such as Ocean Alliance, (ii) its long-term growth prospect driven by the Westports 2 expansion project, and (iii) its price competitiveness, i.e. lower transhipment tariffs vs. peers such as Port of Tanjung Pelepas and Port of Singapore. We believe that its risk and reward appear balanced with its share price having declined more than 10% from the peak.

Upgrade to MARKET PERFORM from UNDERPERFORM.

Risks to our call include: (i) a significant pickup in the global economy, boosting the global containerised trade traffic, (ii) escalation in the Middle East conflicts; (iii) operating costs turn more benign, particularly fuel, and (iii) its expansion plans and tariff revision materialise sooner than expected.

Source: Kenanga Research - 11 Nov 2024