Westports Holdings Bhd
(July 26, RM3.60)
Maintain buy with an unchanged target price of RM4.10: Westports’ second quarter ended June 30, 2018 (2QFY18) revenue of RM394 million was 21% lower year-on-year (y-o-y), primarily due to the adoption of Malaysian Financial Reporting Standard (MFRS) 15 as container volume saw flattish growth of 1%.
Container volume’s muted impact arose from gateway volume (+16%) balancing trans-shipment volume contraction (-6%). Adjusting for MFRS 15 which recognises revenue based on net tariffs (excluding rebates), operating revenue grew 2% y-o-y. Westports’ first half of 2018 (1HFY18) net profit of RM123.8 million (-12% y-o-y) comprised 45% of consensus and our full-year forecasts.
Excluding MFRS 15, earnings before interest, taxes, depreciation and amortisation margins marginally improved off the back of better mix, skewed towards gateway cargo and value-added services. However, higher depreciation tied to container terminal facility 9 (CT-9) completion in December 2017 and subsequent drawdown for financing resulted in lower profit before tax earnings y-o-y for the quarter (-7%). A higher effective tax rate further eased core net earnings to RM121 million (-16% y-o-y).
We expect a recovery in container throughput and a gateway tariff hike revision by 14% in September 2018 to shore up earnings heading into the second half of financial year 2018 (2HFY18).
Organic growth will normalise in 3QFY18 after Westports lost trans-shipment cargo to Singapore in April 2017. Recall, throughput was shifted to enable CMA CGM to meet its Neptune Orient Lines/American President Line acquisition terms. Meanwhile, we believe Westports is well insulated from an immediate direct overspill of a trade war as the utilised Asia-Transpacific trade lane falls beyond Westports.
While there may be lingering concerns over global trade, we believe Westports has just weathered the worst.
Aside from being poised for an earnings recovery, Westports 2 potentially catalyses valuations further, once results of its feasibility study emerges in late 2018. Key downside risks include lower exports resulting in lower gateway volume and higher fuel costs. — Affin Hwang Capital Research, July 26