This article first appeared in The Edge Financial Daily on April 27, 2018

Westports Holdings Bhd
(April 26, RM3.39)
Maintain buy with an unchanged target price (TP) of RM4.10: Westports Holding Bhd’s first quarter of financial year 2018 (1QFY18) results were below market and our expectations. Net profit declined 12% year-on-year (y-o-y) to RM123.8 million in 1QFY18 on the back of lower revenue and a higher tax rate. Container throughput fell 7% y-o-y due to the impact from the realignment of shipping alliances and industry consolidation, which led to some transhipment cargo shifting from Westports to Singapore since 3QFY17. We expect a better second half of 2018 (2HFY18) performance as throughput growth turns positive y-o-y. We reiterate our “buy” call with a discounted cash flow-based 12-month TP of RM4.10.

Westports’ 1QFY18 net profit of RM123.8 million (-12% y-o-y) comprised 22% of consensus and our previous full-year forecasts of RM557 million and RM575 million. We were surprised by the higher-than-expected tax rate. We are cutting our earnings per share forecasts by 5% in FY18 estimate (FY18E) to FY20E to reflect a higher tax rate of 24% (similar to 1QFY18) versus our previous assumption of 20%. Revenue declined 26% y-o-y to RM385 million in 1QFY18 mainly due to the absence of construction revenue for Container Terminal 8 (CT8) and CT9 expansion and the adoption of Malaysian Financial Report Standard (MFRS) 15, that is, recognising revenue based on net tariffs (excluding rebates). We gather that revenue declined 1% y-o-y excluding the impact of MFRS 15 and construction revenue.

Earnings before interest, taxes, depreciation and amortisation (Ebitda) only declined 2% y-o-y in 1QFY18 as the cost of sales fell by a sharper 44%, partly due to the MFRS 15 impact. The Ebitda margin improved to 60.9% in 1QFY18 from 54.5% in 1QFY17, which reflects the normalised margin going forward due to MFRS 15 and no further distortions from construction revenue. Profit before tax (PBT) fell 9% y-o-y in 1QFY18 due to higher interest expense.

Container throughput fell 7% y-o-y to 2.25 million 20-foot equivalent units (TEUs) in 1QFY18. Transhipment cargo declined 18% y-o-y to 1.48 million TEUs while gateway cargo jumped 25% y-o-y to 770,000 TEUs. The impact of transhipment cargo movements from shipping alliances continues to be felt while gateway cargo is growing due to rising import/export activities as congestion has eased.

We expect a better 2HFY18 performance on expectations of a cargo throughput recovery and tariff hike of about 14% for gateway cargo in September 2018. Key downside risks include a trade war affecting demand for shipping traffic and higher fuel costs. — Affin Hwang Capital Research, April 26