Taxes a big burden for FY22F
? 1Q22 core net profit was below expectations at 22%/23% of our/consensus
full-year forecasts, due to a higher than effective tax rate.
? Westports FY22F earnings may encounter headwinds from a potential yoy
decline in container volumes, and a softening of box storage revenues.
? Reiterate Hold, with a lower DCF-based TP of RM3.78 after we cut our EPS
forecasts and raise the Ke from 7.3% to 7.9% (due to higher risk-free rate).
Higher effective taxes knock 1Q22 core net profit down 19-21%
1Q22 core net profit of RM152m was 19% lower yoy and 21% lower qoq. This was
mainly due to a huge jump in the effective tax rate to 39% in 1Q22, vs. 24% in 1Q21 and
an unusually-low 16% in 4Q21. Stripping out the tax impact, the 1Q22 was decent with
EBIT flattish yoy and up 5% qoq. The tax burden in 1Q22 was especially heavy, partly
because of the Prosperity Tax effective 1 Jan to 31 Dec 2022 (which imposes a 33% tax
on profits above RM100m, with the normal corporate tax rate of 24% applicable only to
the first RM100m in profits), and because the additional deferred tax income that was
accrued in 4Q21’s P&L is now being gradually reversed in the current year. The latter
factor suggests that FY21F’s effective tax rate may end up being higher than our current
forecast; we are waiting for further clarification from Westports on this issue.
Chinese port congestion a threat to “near identical” volumes
Westports saw container port revenues rise 4-5% yoy and qoq. Although box liftings fell
10% yoy and fell 3% qoq, which was entirely due to the fall in transhipment (t/s) volumes,
this was more than made up by higher average per teu lifting rates, driven by higher
demand for box and reefer storage (due to yard congestion in 4Q21 which spilled over
into early-1Q22), and a higher proportion of gateway cargoes. The box volume decline
was the result of severe levels of global port congestion which pushed container liners to
bypass t/s ports in favour of direct services, while Westports’ own congestion pushed
some of its customers to switch to its neighbour Northport. Despite the 10% yoy fall in
container volumes in 1Q22, Westports is guiding for “near identical” volumes in FY22F
compared to FY21; hence, we cut our volume growth forecast from 6% to 1%. However,
we think there is still downside risk to volumes if Westports’ customers do not switch back
from Northport, or if China’s ongoing zero-Covid lockdowns snarl traffic for long periods.
Value-added services may tail off as yard congestion has eased
The demand for value-added services (VAS), such as box storage and reefers may also
decline in the coming quarters as Westports’ yard has decongested from near-100%
utilisation in late-4Q21 to about 80% currently. We have modelled-in a 20% drop in VAS
revenue per teu handled for FY22F. Separately, the ‘Westports 2’ (W2) expansion project
continues to be delayed as it waits for the government to sign-off on the concession
agreement, which Westports now expects in late-FY22F at the earliest. Upside risk:
sharper-than-expected recovery in container volumes; downside risk: uncertain returns
on the W2 project as concession terms are unknown and inflation could inflate capex