This article first appeared in The Edge Malaysia Weekly on August 24, 2020 - August 30, 2020

DESPITE second-quarter 2020 results and container throughput exceeding expectations, Westports Holdings Bhd is not optimistic that its container throughput in the second half of the year (2H2020) will return to the 2019 levels.

“I really doubt it. The world is not going to get much more confident than it is now. We might get a boost from one-off cargo like phase-in or phase-out vessels, but we doubt core (cargo) traffic will grow versus 2019,” its CEO Datuk Ruben Gnanalingam tells The Edge.

This still sombre outlook clouds the financial performance of the country’s largest container terminal operator in 2H2020, bringing into question whether now is the time to accumulate shares in Westports.

On July 24, the company announced a 19% year-on-year decline in net profit to RM134.34 million for the second quarter ended June 30, 2020 (2QFY2020). Revenue for the quarter fell 5% y-o-y to RM431.6 million, beating consensus expectation of a 10% to 20% drop.

The weaker quarterly performance dragged down the group’s net profit for the first six months of 2020 (1HFY2020) by 6% y-o-y to RM287.15 million. Revenue, however, increased to RM905.07 million compared with RM869.64 million in 1HFY2019.

Analysts have either upgraded the stock and boosted their earnings forecasts and target prices for 2HFY2020 or reiterated their “buy” rating on the stock with a higher target price, following its better-than-expected 1HFY2020 results.

They are more upbeat on Westports than Ruben, projecting that the group’s container throughput will recover in 2H2020 as more countries reopen their economies after going into lockdown in the first half of the year to halt the spread of Covid-19.

In her July 27 report, Hong Leong Investment Bank (HLIB) Research analyst Nazira Abdullah upgraded her rating on Westports to a “buy” from a “hold”, with a higher target price of RM3.98.

The upgrade could mean that the analyst had a more bearish outlook on the group prior to the 2QFY2020 results announcement.

Other analysts are also calling for a “buy” on the counter.

One of them is UOB Kay Hian’s Kong Ho Meng, with a target price at the top end of RM4.78. Saffa Amanina of BIMB Securities Research has a “hold” call, with a target price of RM3.90.

Westports handled 4.8 million TEUs (20-foot equivalent units) of containers in 1H2020, compared with 5.27 million TEUs a year ago. The 9% drop in container throughput was due to lower transhipment container volume handled, which fell 19% y-o-y. However, resilient gateway container throughput in the first half of the year at 1.76 million TEUs — compared with 1.73 million TEUs in the previous corresponding period — cushioned the blow.

Asked whether Westports’ container throughput this year could at least match 2019’s 10.8 million TEUs, Ruben says this is unlikely, adding that the best-case scenario would be a 5% decline in volume to 10.25 million TEUs.

“This year’s [container throughput growth] will be negative for sure. [I expect] 2021 will be better than 2020, maybe similar with [the volume seen in] 2019 or possibly slightly higher,” he adds.

In a best-case scenario, Westports’ container throughput could increase by 6% to 10.9 million TEUs in 2021, says Ruben.

“For volume to be capped at -5% this year is not easy, but it is possible. The same goes for it to grow 6% next year — not easy, but possible. This is, however, the best-case scenario and not the likely scenario,” he says.

In a July 27 report, Kong of UOB Kay Hian upgraded Westports’ earnings forecasts for FY2020, FY2021 and FY2022 by 9%, 4% and 2% respectively, owing to its better-than-expected 1HFY2020 performance and signs of recovery thereafter.

He maintained a “buy” call on Westports, but upgraded the target price to RM4.78 from RM4.70, based on earnings upgrades and rolling forward valuation to 2021 horizon.

“This implies 23 times 2021F PE (within a five-year mean), 13 times EV/Ebitda and 2.3% dividend yield for 2020 (3.3% for 2021). This is based on DCF valuation to 2054, but excludes the Westports 2 expansion (involving Container Terminal 10 to CT17).

“Most of the earnings risks, including volume weakness and dividend cuts, have been fully priced in. However, we commend the company’s outperformance expectations in the current environment,” Kong says in the report.

He believes Westports’ long-term value remains intact, and that the group’s fundamentals may recover more quickly those of other stocks.

Nazira of HLIB Research has also upgraded her earnings forecasts for Westports by 15% for FY2020 to FY2022, following the stronger-than-expected 1HFY2020 results.

She also upgraded her call on Westports to a “buy” from a “hold”, with a target price of RM3.98, from RM3.66 previously. She says now that the worst of the global lockdown is over, Westports is poised to ride the recovery in global trade.

“While we note that global consumption activity remains uncertain amid the worsening Covid-19 count worldwide, as well as re-escalation of souring US-China relations, we believe the worst is over for Westports and volume should recover gradually in 2H2020 as the global economy has started to reopen,” says Nazira.

Westports closed at RM3.80 last Tuesday, valuing the group at almost RM13 billion. Year to date, its share price is down 9.7%. The counter hit a 52-week high of RM4.54 on Nov 13, 2019, and a 52-week low of RM2.97 on March 17 this year.

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