This article first appeared in The Edge Financial Daily on July 24, 2017

Westports Holdings Bhd 
(July 21, RM3.74)
Reiterate hold recommendation with an unchanged target price of RM3.84: Westports Holdings Bhd delivered the second quarter of financial year 2017 (2QFY17) core net profit of RM149 million, down 6.8% year-on-year (y-o-y) on the back of lower volumes and higher fuel prices, partially offset by a RM11.8 million insurance claim received. 

Container volumes fell 10.9% y-o-y during 2QFY17, as a result of a 17.5% decline in trans-shipment (t/s) volume, partially offset by 7.3% growth in gateway volume. As the proportion of gateway volume rose 5.4% points y-o-y to 31.8% in 2QFY17, the average unit revenue for the container port business rose 4.9% y-o-y to RM160 per twenty-foot equivalent unit (TEU), in our estimate.

Although the t/s volume decline of 17.5% y-o-y during 2QFY17 was more than our forecast of a 12% fall, the gateway volume growth of 7.3% y-o-y outperformed our forecast for a 4.3% increase. The latter mitigated more than one-third of the negative y-o-y impact on profits from the fall in t/s cargoes. The gateway volume expansion during the 2Q was driven by a 9% y-o-y rise in export volume, while imports rose 3%.

Intra-Asia cargoes continued to grow at a healthy rate of 5.2% y-o-y during 2QFY17, as half of intra-Asia cargoes are gateway in nature. Conversely, most of the other trade routes saw double-digit declines, led by Asia-Africa cargoes which fell 65.9%, followed by Asia-Europe cargoes which fell 26.3% y-o-y. These trades are dominated by t/s volume. Consequently, intra-Asia volume now comprise 56.6% of Westports’ total volume, up a staggering 8.7% points y-o-y.

Westports revised down its volume guidance for FY17 forecast (FY17F) to a y-o-y decline of between 7% and 12%. Back on June 1, 2017, Westports publically guided for an annual volume decline of a “single-digit percentage”; so clearly, the outlook had been worse. 

Taking the cue from Westports, we have revised our volume decline assumption from 4.2% y-o-y to 8% for FY17F, with t/s volume now expected to fall 12.4% y-o-y, but gateway volume up 5%.

We do not see the need to be worried, since the worst was already felt in 2QFY17. CMA CGM S A had completed the transfer of its annualised target of one million TEUs to Singapore by 2Q17, while United Arab Shipping Company S A G (post-merger with Hapag-Lloyd) also completed the transfer of 900,000 TEUs of t/s cargoes to Singapore by June 2017. 

As such, the level of t/s cargoes handled by Westports will most likely increase sequentially in 3QFY17, and also into 4QFY17. The robust growth of gateway cargoes during the first half of FY17 (1HFY17) of 5% y-o-y has also continued into July.

Westports reported an effective tax rate of 21.3% in 1QFY17 and 14.7% in 2QFY17, for an average of 18% in 1HFY17. Our FY17F is for an effective tax rate of only 2.1%. We believe this is achievable, as Westports will complete phase 2 of Container Terminal 8 (CT8) by July and phase 1 of CT9 by December. 

As such, this will allow Westports to offset its investment tax allowance and capital allowances against its full-year taxable income. Hence, the taxes accrued in 1HFY17 will likely be reversed in 2H17F, in our view. — CIMB Research, July 20