• The Inland Revenue Board of Malaysia (IRB) has raised an additional tax assessment of RM121mil to Westports. The details are as follows:

1. Total annual lease payment amounting to RM300mil made by Westports to the Port Klang Authority for the years of assessment from 2013 to 2018 (where the IRB has now assessed that the annual lease payment as not allowable for deduction in tax computation); and

2. Deferred revenue of RM8mil for the year of assessment 2018.

• Westports will appeal and contest against the notice of additional assessment. In the worst case, assuming that Westports is unsuccessful and is liable to pay the full amount, this will erode its FY20F earnings by 20% but only shave its NTA by 4 sen or 1.4% from RM2.86 as at 30 June 2020 to RM2.82.

• We are not overly perturbed over the latest development, which is likely to turn into a long-drawn legal process that drags on for years (without any actual impact on the bottom line).

• We maintain our BUY recommendation, forecasts and FV of RM4.45, valuing Westports at 23x /PE to its FY21F EPS, in line with its average historical forward P/E. We believe the worst may be over for seaport operators as economies, businesses and borders reopen, translating to a recovery in global trade, and hence improvement in seaports’ throughput.

• Looking beyond the pandemic, the outlook for the port sector in the region (Malaysia included) is resilient, underpinned by global trade and investments in the manufacturing sector that generate tremendous inbound (feedstock) and outbound (finished product) throughput for ports. There have been significant relocations of the manufacturing base by multi-national companies out of China to the region due to the rising labour and land costs, exacerbated by the US-China trade war. Westports has charted a long-term expansion plan to capitalise on these.

Source: AmInvest Research - 6 Oct 2020