Investment Highlights

• We maintain our forecasts and BUY on Westports Holdings with an unchanged fair value (FV) of RM4.03/share based on a rolled-forward FY24F PE of 17x, in line with its 3-year average. Our FV also incorporates a 3% premium to reflect an unchanged 4-star ESG rating.

• Last Friday, Westports Malaysia (WMSB) officially signed an agreement with Ministry of Transport (MoT) and Port Klang Authority (PKA) in Putrajaya to initiate the expansion of container terminals (CT) 10 to 17.

• The expansion constitutes 2 phases: -
  Phase 1: CT10-CT13 (CY2024-CY2038)
  Phase 2: CT14-CT17 (CY2036-CY2053)

• The concession period for all existing areas, which cover 2,011 acres, will be extended 45 years from 31 August 2024 to 31 August 2070, with the option to extend another 12 years to 31 August 2082.

• The 12-year extension to 2082 will materialise upon the acquisition of land below the sea, which is designated for the phase 2 development of CT14-CT17, by 31 August 2045.

• The first 2 terminals are targeted to commence operations by 2H2027 for CT10 and by 2H2029 for CT11. Both terminals are expected to increase capacity by 3mil twenty-foot equivalent units (TEUs). The initial capital expenditure (capex) for CT10-CT11 is expected to be RM2.2bil-RM2.4bil. This involves Westports transferring 2 parcels of land which cost RM610mil to PKA, encompassing 381 acres from PKNS by 1 Sep 2024 and 362 acres from Marina on 31 Aug 2026.

• Land reclamation, dredging and containment activities within Marina and PKNS land for the CT10-CT13 expansion will begin in 2024 (Exhibit 2). The whole reclamation project would incur an annual capex of RM250mil-RM600mil over 4 years, with the first year estimated at RM400mil for the Marina land – in line with our current assumptions.

• The projected capex for Westport 2.0 of RM12.6bil is divided equally between the 2 phases, each amounting to RM6.3bil. Including the replacement capex of the existing CTs, this represents 32% of the total estimated capex of RM39.6bil until 2082.

• Effective 1 September 2024, the fixed lease of Westport 1.0 (the existing port) will increase 40% to RM90mil. For Westport 2.0, a fixed lease of RM1mil will be charged. This translates to a total annual lease payment of RM91mil to PKA.

• Container variable leases vary according to different container sizes. Specifically, for 20-foot containers, the lease will rise by 50% from RM2.00/box to RM3.00/box while increasing by 12.5% from RM4.00/box to RM4.50/box for 40- foot containers. On the flip side, conventional variable lease remained at RM0.10/tonne.

• Westports’s financing plans for Westport 2.0 includes: -
  i) Raise RM5bil perpetual Sukuk Wakalah programme with a sustainable and responsible investment (SRI) framework, which includes mangrove replacement and electrification/automation of terminal operating equipment/architecture, reaffirming our 4-star ESG rating, and
  ii) Inject equity via dividend reinvestment, share placements or strategic investor. Management will conclude the investment decision by 2026 with the plan to secure RM800bil-RM1.2bil (7%-10% of current market cap) by 2027. We expect the company to spread out the equity injections in tandem with the port’s growth in revenue and earnings to partially cushion any earnings dilution within the next 4 years.

• 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 at 30 Sep 2023, Westports’ gross gearing ratio stood at only 0.26x and a comfortable FY24F net interest cover of 23x, providing ample debt headroom for expansion. This could mean up to RM6bil of additional debt-financing, which could fund the first phase of Westports 2.0 for the next 14 years to 2038, long after management’s equity investment decision has been made.

• Management has also embarked on request for port tariff revisions to provide competitive pricing in the region. We understand that the existing local box tariffs are lower than those of neighboring regions such as Jakarta, Philippines and Thailand. Recall that the last tariff revision for conventional cargo was in 2012 and container in 2019. In the past revisions, charges for handling conventional cargo increased by 10%-30%, whereas containers saw a 30% hike. We estimate that a 10% increase in tariff charges could substantively raise FY25F earnings by 25%.

• We continue to like Westports Holdings for its mid-to-long term outlook, underpinned by:
  i) Pulau Indah benefitting from supply chain shifts with more distribution and logistics factories being established in the area.
  ii) Stronger growth in intra-Asian trade, partially attributed to rising container volumes across China’s ports, despite slower-than-expected rebound this year.
  iii) Westports 2.0 strategically positioned to capitalise on the region's growth, catalyse national trade expansion, improve Malaysia’s logistics efficiency and competitive edge while supporting multinational liners’ transshipment needs.

• The stock is currently trading at attractive 15x FY23F PE, 14% below its 3-year average of 17x.

Source: AmInvest Research - 11 Dec 2023