Highlights

• Long-term concession...Westports commenced operation since August 1994 with concessions run through to 2054.

• Strategic location… in Port Klang, which is ranked as 13th busiest port in the world in 2014 and handled over 48% of overall Malaysian seaborne traffic in 2013. Since its inception 20 years ago, Westports has handled 65m TEUs and commands 76% share of Port Klang’s container throughput.

• High asset productivity… t’s utilisation rate has been stable at an average of 77% for the past five years. We understand that comfortable utilization rate is around 70%, that is when vessels have a waiting time of approximately one hour.

• Container volume to drive growth...operates 4 business segments: i) Container, ii) Conventional, iii) Marine; and iv) Rental. Container business contributes 82% to total revenue.

• Solid expansion plan… CT 8 expansion plan has commenced in early 2015 in which Phase 1 will be ready by 2016 while Phase 2 by mid-2017. Upon completion, Westports will have total handling capacity of 13.8m TEUs and also able to accommodate world’s largest container vessel.

• Dividend payout ratio at 75%… we expect dividends of 11.2sen, 13.7sen and 15.7sen between FY15-17, translating into dividend yield of 2.6%, 3.2% and 3.7%, respectively.

• Potential tariff hike… overnment is expected to announce decision of container tari ff since it was last adjusted in 2003. We gathered that soonest it could be implemented on August 2015 while latest could be January 2017.

Catalysts

• Expansion plan to drive earnings growth.

• Extension of investment tax allowance for CT 8 and CT 9.

• Strong cash flow and dividend payout ratio (75%).

• Potential tariff hike.

Risks

• Container trade volatility.
• Postponement of tariff hike.
• Stiff completion from regional ports.
• Consolidation of shipping liners.
• Development of third port at Port Klang.

Valuation

• We like the company business model – sustainable, recurring and yet growing income with 3-Year CAGR EPS of 11.9% on CT 7 to CT 8 expansion, decent for port operator. Based on our DCFE valuation, we have derived a fair value of RM5.03.
• We initiate coverage with BUY recommendation given potential 20.4% total upside. Near term catalyst could come from final decision on tari ff hike and also extension of investment tax allowances for CT8 and CT9.

Source: Hong Leong Investment Bank Research - 23 Jun 2015