Investment Highlights

• We maintain BUY call on Westports Holdings with a higher fair value (FV) of RM4.28/share (v. RM4.27 previously). Our FV reflects an unchanged rolled-forward FY24F P/E of 18x, at parity to its 5-year average with a 3% premium of a 4-star ESG rating.

• Westports’ FY23 core net profit (CNP) of RM779mil is within our expectations, coming in 2% above our estimate and 4% of consensus. Management declared a DPS of 8.72 sen in 4QFY23, bringing FY23 total DPS to 16.9 sen, in line with our DPS estimate.

• We marginally raise FY24F-FY25F earnings by 1%-2% on lower depreciation charge estimates. This was partially offset by a more prudent volume growth assumption of 2% (vs. 5% earlier) from a higher FY23 base effect notwithstanding a positive outlook on Intra-Asian trade growth reflective of improved FY23 performance (+12% YoY).

• This assumption is in line with management’s guidance of low single-digit growth, fueled by immediate impact from the Israeli-cargo ban on its key client, ZIM Integrated Shipping alongside heightened Middle-Eastern geopolitical risk.

• Westports’ FY23 CNP rose 16% YoY to RM779mil from RM671mil mainly due to a 7%-point decline in effective tax rate to 22.5% from the absence of 2022 prosperity tax provisions, together with revenue growth of 4% contributed by marine (+21% YoY), rental (+8% YoY) and container (+2% YoY).

• Nevertheless, the magnitude of revenue growth was capped due to a decline in conventional revenue by 10%. The decline stemmed from lower break bulk volume (-44% YoY) as project cargoes and ingots switched to containers due to lower post-pandemic freight rates.

• However, the impact is partially mitigated from a better take-up rate in Roll-on and Roll-off (RORO) shipping with cumulative 3mil units handled in Dec 23 since inception, given rising demand for electronic vehicles (EVs) motivated by government’s tax incentive.

• YoY, FY23 container throughput grew by 8% to 10.9mil TEUs, while container revenue recorded only a marginal increase of 2% to RM1.8bil due to value-added services normalising to pre-pandemic levels on declining storage and reefer charges. This is attributable to ship dwelling time easing by more than 20%, hence, fewer days spent at the container yard.

• Even so, electricity cost surged (+18% YoY) despite lower reefer units due to imbalance cost pass through (ICPT) charges that went up 4.6x to 17 sen/kWh from 3.7 sen/kWh in 4Q22.

• QoQ, 4QFY23 CNP rose 6% mainly due to an 18% increase in conventional revenue attributable to key clients ramping up liquid bulk shipments at the end of the year to fulfil contractual quotas and avoid shortfall penalties. Additionally, rental revenue grew 8% to RM14mil from new tenants in Westports Logistics Centre.

• In 4QFY23, container throughput volume improved by 4% to 2.9mil TEUs from 2.8mil TEUs in 3QFY23, due to higher gateway volume (+7 QoQ) and stable transshipment (+2 QoQ) premised on Lunar New Year consumption and growing foreign direct investments.

• Additionally, management reiterated negligible impact from the Red Sea disruption at this juncture. For the first 2 weeks of January 2024, ports had seen delays in cargo arrivals, but throughput volume recovered and normalised with a larger number of cargo arrivals in the second half of January 2024.

• Management also embarked on requests for container tariff revisions to provide competitive pricing in the region. We understand that the existing local box tariffs are lower than those of neighbouring regions such as Jakarta, Philippines and Thailand. They are hopeful to sign the agreement by 2HFY24 with implementation earliest in 2025. Recall that Westports proposed a 50% tariff hike a decade ago, but was granted only a 30% tariff increase from Ministry of Transport (MOT) which were implemented over 2 stages- a 15% increase in 2015 and another 15% in 2019. We estimate that a 10% increase in tariff charges could substantively raise FY25F earnings by 25%.

• We view this potential tariff hike to be supportive for Westports’ facility expansion plans. Westports aims to maintain gross gearing ratio below 2.0x with the additional Sukuk Wakalah programme and a finance service cover ratio of above 1.25x. As of FY23, Westports’ posed a healthy net gearing ratio of only 0.08x and gross debt to equity ratio of 0.24x, providing ample debt headroom for expansion. This could mean up to RM6bil of additional debt-financing that could fund the first phase of Westports 2.0 for the next 14 years to 2038, a long time before any equity investment decision needs to be made.

• Key downside risks are: i) global trade headwinds from longer Red Sea transit disruptions and worsening Panama Canal draught, which may have rippling effects to regional shipments, ii) high operational cost due to unfavourable forex rates and elevated Brent crude oil price environment, and iii) potential delays and insufficient magnitude of a tariff hike.

• We are cautiously optimistic on Westports’ mid-to-long-term outlook, underpinned by:
  
  i) Potential tariff hike in 2H2024, with implementation in stages from 2025F onwards.
  
  ii) Pulau Indah benefiting from supply chain shifts with more distribution and logistics factories being established in the area,
  
  iii) Stronger growth in regional trade, partially attributed to rising container volumes across China ports, partly mitigated by a soft landing for US economic growth and consumer spending this year, and
  
  iv) Westports 2.0 expansion plan to capitalise on regional growth given the port’s strategic position in the EastWest ASEAN trade routes.

• The stock is currently trading at an attractive FY24F PE of 16x, below its 5-year average of 18x, while offering compelling dividend yields of 5%.

Source: AmInvest Research - 5 Feb 2024