We recently met up with Westport’s management and came out feeling neutral on the company’s prospects. Current tariff for Port Klang has increased to RM182/TEU (from RM161) effective on 1st March 2019 which will eventually increase Westports’s earnings. Management has guided for single-digit container throughput growth of 3%-8% for FY19, in line with our forecast of 5% YoY growth. We increase our FY19 and FY20 earnings forecast by 5% and 3.9% after we take into account a higher throughput volume growth assumption of 5% (from 4%). Maintain HOLD, with TP of RM3.79 based on DCFE (CoE: 8.0%).

We Recently Met Up With Westport’s Management With the Following Key Takeaways:

Tariff. Current tariff for Port Klang has increased to RM182/TEU (from RM161) effective on 1st March 2019 which will eventually increase Westports’s earnings. This tariff hike will immediately apply to gateway segment which contributes 35% of container volume. However, the new effective tariff will not apply immediately to transhipment segment as this is based on long term fixed contracts of 3-5 year. In our model, we have pencilled in 10% tariff increase for gateway segment for the full year FY19.

Expected growth. Management has guided for a single-digit container throughput growth of 3%-8% for FY19. Our forecast of 5% is at the middle of this guided range as we choose to remain at the par with management guidance. Management is confident that 5% (from 0% in FY18) transhipment throughput growth is achievable as Intra-Asia is showing decent growth. Management has guided that January and February growth are running close to double digits YoY for Intra-Asia segment. We believe that increase Intra-Asia volume could be driven from the US-China trade war where China has redirected its trade flows with the US to Asia.

Utilization. Currently, Westports has an utilisation rate of 68% on its current capacity of 14m TEUs (for CT1-CT9). Management has guided a benchmark utilisation rate of 75% for the port to operate efficiently. Upon reaching 75% utilisation rate, management indicated that they will further increase the handling capacity of the CT1- CT9 by another 1m TEUs to 15m TEUs. This will be done by adding new equipment and improving workflow process of the ports. Additional equipment includes 5 new quay cranes and 15 new rubber-tyred gantry crane (RTGC). The procedure will take about 1.5 years to install and will cost about RM500-600m.

Updates on CT10-CT19 expansion. Feasibility study on the proposed expansion of CT10-CT19 is targeted to complete by 2QFY19. Following that, Westports will start negotiating its concession with the Government of Malaysia and is expected to complete by the end of FY19. Following which, land reclamation for CT10 will start and take two years to complete (early FY22). Construction of the wharf will start at the end of FY21 and is expected to complete by the end of FY22. Subsequently, process of paving container yard will begin and conclude by the end of FY23. The funding for this expansion will be a combination of sukuk, dividend reinvestment plan and internally generated funds.

Forecast. We increase our FY19 and FY20 earnings forecast to RM582.5m (+5%) and RM652.3m (+3.9%) after we take into account a higher throughput volume growth assumption of 5% (from 4%) which is in line with management’s latest guidance.

Maintain HOLD, with TP of RM3.79 based on DCFE (CoE: 8.0%). While we like Westports for its earnings recovery prospects (driven by throughput recovery and tariff hike), we reckon that the stock is fairly valued at 22.0x and 19.6x FY19-20 PE (5-year mean: 19.8x).

Source: Hong Leong Investment Bank Research - 10 Apr 2019