This article first appeared in The Edge Financial Daily on April 23, 2018

Westports Holdings Bhd
(April 20, RM3.40)
Maintain market perform with a lower target price (TP) of RM3.60: In terms of container throughput, we believe the nine million 20-foot equivalent (TEU)s in financial year 2017 (FY17) should serve as a new low base for organic growth moving forward, with low single-digit percentage growth expected for FY18.

Growth will be expected to be driven by continued growth in gateway volumes on the back of robust economic growth figures, and recovery of transhipment volumes in a post-reshuffling business environment.

As for the upcoming first quarter 2018 (1QFY18) results (tentative release next week), we expect numbers to come in poorer on a year-to-year basis as the reshuffling of shipping alliances only came into effect in April 2017.

Despite the expected overall recovery in container throughput, we believe bottom line earnings will see some deterioration in FY18. Our current core net profit (CNP) forecasts of RM500.6 million and RM539.4 million for FY18 and FY19 imply earnings growth of -23% and 8% respectively.

The poorer earnings are mostly attributed to reversion of the effective tax rate closer to usual corporate tax rates (compared with the effective tax rate of 3.7% in FY17), given the expiration of tax incentives in December 2017, and increased finance costs, following borrowings drawdown of RM250 million in FY17. That said, on the earnings before interest and tax (Ebit) level, our FY18 to FY19 forecasts for projects growth is from 3% to 6%.

Furthermore, note that FY18 will see the full compliance of Malaysian Financial Reporting Standards (MFRS) 15, superseding the previous MFRS 8 and MFRS 111 reporting standards. This would result in significant changes towards its revenue and cost of sales line, but is largely expected to have a neutral impact on bottom-line earnings.

Having received an approval-in-principle for the expansions of container terminal 10 (CT10) to CT19, we believe this is a longer-term prospect for the group. Westports had just completed the development of CT9 Phase 1 last year, bringing container capacity to 14 million TEUs per annum (from around 12 million TEUs the year prior). As such, we do not expect any further developments beyond CT9 in the next two years to three years. Over the longer-term, CT10 to CT19 are estimated to bring the group’s container capacity up to 30 million TEUs per annum.

Post-review, we lowered FY18 to FY19 CNP by 22% to 19%, taking into account the aforementioned higher taxes and finance costs. Our forecasts assumed total container throughput growth of 3% to 5% for FY18-FY19.

We lowered our dividend discount model-derived TP to RM3.60 (from RM3.70 previously), following the earnings adjustments and rolling-forward of our valuation base-year to FY19, based on the assumptions of 6.2% discounting rate, 1% terminal growth, and unchanged dividend policy of 75%.

We maintain our “market perform” call as we view its current share price as fairly valued, having dropped 12% over the past 12 months. At current prices, trading valuations are near -1 standard deviation and -1.5 standard deviation of its average forward price-earnings ratio, and price-to-book value respectively. Risks to our call include lower-than-expected growth in gateway container throughput, and slower-than-expected recovery in transhipment container throughput. — Kenanga Research, April 20