Investment Highlights

• We are OVERWEIGHT on the sector which will continue to benefit from growing global trade. Our top BUY is Westports as it (i) is a leading port in Southeast Asia (ii) has a positive long-term outlook underpinned by the implementation of Westports 2.0 plan in 2023F and (ii) has a stable dividend yield of 4%. We also like Bintulu Port (BiPort), a beneficiary of the strong and resilient demand for LNG with a decent dividend yield of 3%. Also, BiPort’s earnings over the long-term are expected to be supported by Samalaju Industrial Port.
  We may downgrade the sector if: (i) container throughput volume comes in weaker than expected; and (ii) global recession risks and geopolitical tensions exacerbate.

• Our top ESG pick is Westports. Westports clinched 2 gold trophies at The Edge Malaysia ESG Awards 2022. As one of the constituents of FTSE4Good Index, Westports is committed to achieve net-zero carbon emission by 2050, through emissions intensity reduction and decarbonisation. The company already has a proposed schedule for phasing out diesel-operated equipment and incorporated the Task Force on Climate-related Financial Disclosures framework into its management process. Westports continues to leverage on technology to achieve greater efficiencies, including investing in energy-efficient infrastructure.

• Relaxation of China’s zero-Covid policy. This would increase China’s manufacturing activities, leading to higher exports and transhipment activities for Malaysian ports in 2023F. We also expect an improvement in China’s palm imports on the back of higher HORECA activities. In the short-term however, we believe that the relaxation may be too late for China manufacturers to capitalise on 2022 Christmas-driven demand.

• Normalising freight rates. The Shanghai Containerised Freight Index (SCFI), which represents spot rates for containers loading in Shanghai and often used to gauge the health of global trade, fell by 77% to 1,171 in Dec 2022 from the peak of 5,110 in Jan 2021. The decline was due to easing supply chain disruptions caused by the pandemic. We anticipate the SCFI to continue to normalise.

• Reshaped global supply chain. We believe that the Covid-19 pandemic and trade tensions between countries have reshaped the global supply chain, resulting in a diversion of investments from China to the Southeast Asian region, thus boosting container throughput in the region. The container throughput growth in the region is also supported by fast-growing sectors, such as communication equipment, semiconductors, textile and apparel. Malaysia is home to many suppliers for these industries in this region.

• Westports 2.0 mega port expansion project. The expansion was unveiled in Aug 2017 which covers the development of 8 new terminals – CT10 to CT17 – that will double Westports’ container handling capacity to 28 mil TEUs from 14 mil TEUs currently (Exhibit 6). Presently, Westports is negotiating with the Public-Private Partnership Unit, the Ministry of Transport and other relevant government agencies on the concession terms with the development cost estimated at RM12.6bil in total over 25 to 30 years. We believe that the expansion could take place mid-next year.

• Renewal of Bintulu Port’s concession underway. The concession will expire on 31 Dec 2022, with the option to extend for another 30 years to 2052. The extension has been approved in principle, and BiPort as well as Bintulu Port Authority are in the midst of finalising the terms and conditions for the new concession agreement. An interim agreement was signed for 6 months from 1 Jan 2023. We expect the terms to be finalised by the expiry of this interim agreement.
  We believe that would be a hike in tariffs upon the renewal of the concession. Bintulu Port’s average terminal handling charges are significantly lower than Samalaju Industrial Port (Exhibit 7). Likewise, Bintulu Port’s terminal handling charges for its containers are also lower than peers (Exhibit 8). Recall that Bintulu Port’s general cargo tariffs were last revised 39 years ago in 1983 while container tariffs were raised 23 years ago in 1999.

• Talks on extending Sabah Port’s concession has begun. Suria Capital has commenced negotiations with the state government for a 30-year extension to its concession to operate ports in Sabah. Currently, Suria Capital holds a 30-year concession from 2004 to 2034. We understand that the tariff revision was approved in principle by the State Cabinet in 2020 for implementation at a later date that will be decided by the state government. The tariff has remained the same over the past 35 years.

Source: AmInvest Research - 27 Dec 2022