Westports Holdings upgraded from ‘hold’ to ‘add’

PETALING JAYA: CIMB Equities Research has upgraded Westports Holdings Bhd from “hold” to “add” as it rolls over its discounted cashflow-based target price to end-CY18.

It said the stock price decline was excessive.

The research house said based on Westports’ nine months financial year 2017 (9MF17) core net profit of RM433mil, its fullyear results will be approximately 4% below its current forecast but 9% above consensus.

While nine months (9MFY17) transhipment volumes fell, Westports’s earnings have been buffered by a rise in gateway cargoes and it expects a tax credit in fourth quarter financial year 2017 (4QFY17) to lift FY17 forecast profits on-year.

During the 3QFY17, the core net profit was RM143mil (65% of CIMB Research’s full-year), down by 9.2% on-year due to lower volume and higher fuel costs.

Container volume declined 14% on-year to 2.14 million twenty-foot equivalent unit (TEU); transhipment volume fell 23% on-year, partially offset by the 14% rise in gateway volumes, continuing a trend seen since 2Q17.

Due to the better mix of gateway cargoes and fewer CMA CGM cargoes, average container rates rose by 8% on-year during 3Q17 and 4% during 9M17 (CMA CGM enjoyed the lowest rates as Westports’ major customer).

Transhipment volume fell 17.5% on-year to 1.52m TEUs in 2Q17 as the OCEAN alliance took effect from April 1, taking over from the previous Ocean 3 alliance.

While CMA CGM is one of the leading partners of both alliances, the OCEAN alliance sharply reduced the number of Asia-Europe and Asia-Africa calls at Westports, transferring them to the Port of Singapore, as a consequence of CMA CGM buying over Neptune Orient Lines /APL.

Meanwhile, UASC also moved cargoes to Singapore from July onwards after HapagLloyd acquired it. As a result, Westports’s transhipment cargoes declined even further to 1.42m TEUs in 3Q17, down 23% on-year and 7% on-quarter.

This was partially offset by an 80% on-quarter increase in OCEAN alliance transhipment cargoes during 3QFY17, when the backhaul calls finally arrived at Westports.

Under the Ocean 3 schedule, Westports had a mix of front and backhaul calls but, under the new OCEAN schedule, Westports is now receiving mainly backhaul calls.

“Westports may have passed the lowest point of its transhipment volume as 4QFY17 forecast is seasonally stronger. For FY17, we forecast transhipment volume to fall 16% on-year and by a small 2% on-year in FY18, mainly because 1QFY17 transhipment was still robust,” it said.

Meanwhile, gateway volume did very well, rising 7% on-year in 2Q17 and 13% in 3Q17 due to strength in export volumes; we forecast FY17 gateway growth of 9% before it rises by a further 5% in FY18.

Overall, CIMB Research forecasts volume decline of 9.5% on-year in FY17 and marginal growth of 0.2% in FY18.

Improvement in operating efficiencies Container Terminal 8 (CT8) commenced operations from August 2017, increasing port capacity to 13m TEUs per annum.

Hence, the utilisation of the overall container port declined from around 85% in FY16 to only 66% in 3QFY17, resulting in an improvement in efficiency and almost no berth waiting time.

Phase 1 of CT9 is expected to be completed by Dec 2017, further raising the capacity to around 14 million TEUs enabling Westports to pitch for more business.

“While we forecast Westports’s pretax profit to decline 12% on-year in FY17 from the fall in liftings, its core net profit should edge up 2% on-year as its effective tax rate is forecast to drop from 16% in FY16 to 4% in FY17 and 8% in FY18.

“The capitalisation of more than RM1bil in capex in FY17 from CT8 Phase 2 and CT9 Phase 1 enables it to benefit from capital allowance and investment tax allowance claims this year and next.

“The effective tax rate is expected to rise to 22% in FY19F, close to the 24% statutory tax rate,” said CIMB Research.

Westports may have passed the lowest point of its transhipment volume as 4QFY17 forecast is seasonally stronger.