This article first appeared in The Edge Financial Daily, on May 3, 2016.

Westports Holdings Bhd
(April 29, RM4.15)
Downgrade to “hold” with an unchanged target price (TP) of RM4.65: Eliminating disposal gains and other exceptional items of RM20.4 million, Westports Holdings Bhd’s first-quarter financial year 2016 (1QFY16) core profit of RM150.7 million was within expectations, accounting for 24.3% of our full-year forecast and 25% of consensus estimates. 

Year-on-year (y-o-y), 1QFY16 core profit expanded by 25.8%, underpinned by: i) surge in revenue of 12.8%, which more than covered the increase in cost of goods sold of 9.3%, resulting in a margin expansion of 2.5 percentage points at the pre-tax level; and ii) drop in an effective tax rate of 3.8 percentage points due to a tax incentive from investment tax allowances. The increase in revenue was anchored mainly by the increase in tariff in November 2015 and higher trans-shipment throughput, which increased by 9.1%. This has helped to offset the contraction in gateway volume by 1.6% and the roll-in roll-off (or car imports/exports) segment.

Quarter-on-quarter, 1QFY16 core profit surged by 8.6% due to higher trans-shipment throughput by 4% and the first full quarter of tariff hike impact in 1QFY16. Also, a further reduction in fuel expenses (down 25%) contributed to earnings growth, too. There is no change to our FY16 to FY18 earnings projections.

The strong 9.1% growth in trans-shipment was a pleasant surprise to Westports’ management given the high-base effect. It attributed the growth to the one-off upgrading of vessel for certain services, which contributed extra 100,000 boxes in 1Q16 against 1Q15. Going forward, management believes the growth to moderate.

In terms of guidance, management expects a positive growth in throughput, but the growth rate is expected to be lower than last year of 8%. In our model, we assume a growth rate of 2.2% for 2016.  Note that there was a full-quarter effect of tariff hike in 1Q16 of approximately 15%. However, revenue from the container division grew by only 15% y-o-y despite both the increase in trans-shipment and tariff. This indicates that the new tariff has not been fully applicable to trans-shipment volume as expected.

As far as new shipping alliances are concerned, management believes these alliances are to adopt a duo-hub strategy for trans-shipment in the Strait of Malacca. In addition, the formation of these alliances will only take place in April 2017, thus the impact on FY16 earnings is muted. Note that CMA CGM, China Cosco Shipping, Evergreen Line and Orient Overseas Container Line signed a memorandum of understanding to form the Ocean Alliance.

The eighth container terminal’s (CT8) expansion is on track. It has completed 300 metres of wharf and the four new 52m high quay cranes are expected to be operational by mid-2016. Phase 2 development, which consists of an additional 300 metres of wharf, the CT8 yard, second container gate and other port equipment, is scheduled to be operational by 2017.

We maintain our dividend discount model valuation at RM4.65 a share, based on a required rate of return of 6.8%. We downgrade Westports to “hold” due to weaker global trade activities and the limited total upside to its share price. — TA Securities, April 29