• Westports signed a new concession agreement on 8 Dec 2023 that extended its port operatorship to 2070F, in exchange for a commitment to build W2.

• Downgrade from Hold to Reduce, as we do not yet have any clarity on the timing and quantum of tariff hikes that are needed to pay for the heavy capex.

• We also expect equity dilution prior to any benefits from W2. We reduce our DCF-based TP to RM3.11 (Ke: 10%), rolling forward to end-CY24F.

Long-awaited Concession Agreement Was Signed Last Friday

On Friday, 8 Dec 2023, Westports announced that it had signed the Third Supplemental Agreement for the Privatisation of Westports with the Government of Malaysia (GoM) and the Port Klang Authority (PKA). The original agreement was for a 30-year concession to operate the ‘Westports 1’ (abbreviated as ‘W1’) port in 1994-2024F, which was previously extended for another 30 years to 2054F. The new concession signed last Friday requires Westports to commit to building four new container terminals, i.e. CT10-13, which is Phase 1 of the ‘Westports 2’ (W2) expansion project; further extends the concession to operate both W1 and W2 to 2070F, or up to 2082F subject to Westports’ decision to build CT14-17 (which is Phase 2 of the W2 project); and increases the land lease and variable lease rental payments from 1 Sep 2024F onwards.

Investors Should Wait for Further Clarity on Tariff Increases

Our downgrade to Reduce is premised on the fact that Westports has already committed to building W2 Phase 1 (CT10-13) with a capex of at least RM6.3bn (we have pencilled-in RM6.8bn) and is exposed to the risk of cost inflation and project cost overruns. But there is no certainty about the quantum and timing of much-needed regulatory terminal handling charge (THC) tariff increases. As a result, we think there could be de-rating risks if the tariff increases ultimately turn out to be insufficient to adequately compensate Westports for the capex that it has already decided to spend. Tariff increases may also raise the ire of local manufacturers as well as local importers and exporters, as gateway boxes bear the brunt of any port tariff hikes. While it is wholly possible that the PKA will permit sufficiently compensatory tariff hikes over an extended period of time, we do not see why investors should stay invested at this point in time while the uncertainty still exists. It would seem more sensible for investors to reduce their exposure to Westports’ business risks, adopt a ‘wait and see’ approach, before reentering the stock if and when the GoM and PKA send the right signals to investors regarding future tariff increases, in our view. Our DCF valuation of Westports falls to RM2.25, in the worst-case scenario where Westports spends all RM6.8bn on capex, but no tariff increases ultimately materialise. Westports is also seeking out new institutional or strategic shareholders to raise between RM800m and RM1.2bn in new equity, which may result in as much as 10% expansion of the current share base. Upside risks include the potential for an earlier-than-expected announcement of tariff increases; better-than-expected project cost outcome; and faster-than-expected execution of the project that may enable Westports to commission CT10 earlier than the current guidance of 2H27F.

Source: CGS-CIMB Research - 13 Dec 2023