- We maintain BUY on Westports, with an unchanged fair value of RM4.87/share, a 15% discount to our upward revised DCF-derived value of RM5.73/share.

- Our fair value represents a 25x PE against FY16F EPS. This follows the government’s approval of its proposed tariff hikes. The Transport Ministry’s letter of approval dated 5 Aug was addressed to the Port Klang Authority, and was gazetted on 12 June 2015 and 3 Aug 2015.

- The revised tariff covers container terminal handling charges for import, export, transhipment, shifting and restow, storage charges for container and handling charges for heavy lift or uncontainerised cargo.

- To be implemented in two phases, the hike entails an average increase of ~15% on key container tariff items, particularly terminal handling charges, which will take effect on 1 Sept 2015, and an another average increase of ~15% with effect from 1 Sept 2018.

- We believe the rate hikes are justified given that the group has expanded operations over the years, with the addition of two more container terminals and in its announcement yesterday, Westports said the last revision of the key container tariff items at Port Klang was ~14 years ago. The rate increase is higher than our previous assumption.

- We had earlier imputed a 15% hike in our implied gateway container rates with effect from FY16. We have upped our FY15F earnings by 3% (stemming from a 4% upward revision in our gateway rate assumption).

- Our unchanged FY16F implied tariff rate now represents an 11% rise from FY15F’s. We have also incorporated the second stage rate hike from Sept FY18. We have yet to incorporate the potential of lower taxes stemming from its appeal for it under the investment tax allowance.

- For transshipment, we have conservatively incorporated an 8% and a 5% hike in tariffs from FY16F and FY18F, respectively. As noted earlier, transshipment container tariffs are subject to long-term contracts with shippers.

- We maintain our transshipment and gateway container traffic growth at 10% each for FY15F, and at 8% and 10%, respectively, for FY16F. Westports has maintained the total container growth target at 5%-10% for FY15.

- Reiterate BUY for earnings growth prospects from the expansion of the port and the rate hikes for both gateway and transshipment traffic.

Source: AmeSecurities Research - 7 Aug 2015