Although yard congestion has eased slightly (about 90% as compared to August of >100%), management remains concerned on the supply chain disruption and expects congestion to linger into 2022. However, earnings impact is likely limited as the congestion has spurred more value -added services. The concession negotiation with authorities is still on-going and expects to conclude by end of this year. We cut our forecast by 7-10% for FY21- 23 to account for the near term headwinds from the loss of productivity due to the congestion. Downgrade to HOLD, with lower TP of RM4.67 based on DCFE with assumption of CoE: 7.4% as upside is limited after earnings cut.

3QFY21 outlook. Management is guiding c.10% decline in 3Q21 container volume (3Q20: 2.94m TEUs) due to higher base SPLY from “revenge spending” when the country transitioned from MCO1.0 to RMCO, coupled with the yard congestion that the ports currently faced. However, earnings impact is likely limited as the congestion has spurred more value-added services (such as storage and reefer boxes), and has partially negated the higher opex from yard inefficiencies and lower port utilisation.

Congestion likely to linger into 2022. Management clarified that congestion in the yard is happening due to persistent high dwell time for boxes (currently at c.16 days vs c.6 days pre-Covid level) caused by the pandemic induced disruption of supply chain globally as a result from various series of lockdowns. Management expects the supply chain disruption to likely linger for at least 1-2 years as some countries may still impose lockdowns if there’s resurgence of cases as well as the expectation of rapid resupply of inventories when economy reopens.

Westports 2. The concession negotiations with authorities are still on-going and the company is hopeful to conclude the agreement by end of this year. According to management, the dredging and land reclamation works can be carried out as soon as they get the concession approval and they will only need to raise new debt or equity until 15 months after the start of land works. Management indicated that if equity capital is needed, it will likely be up to RM1.3bn (our pro forma calculation indicated that this is about 10% of share base) as well as Sukuk program to raise between RM3bn-RM5bn to fund the entire c.RM12bn capex for the expansion. Management is also exploring dividend reinvestment plan to partially fund the capex of Westports 2. To recap, capex of 1st phase of expansion (CT10-13) is projected to be c.RM4bn (for the first 10 years) and the total capex for the expansion is c.RM12 bn (stretched out for about 30 years). Management also indicated that current projected capex might be higher if steel prices remain high by the time the company is building the wharf and buying the cranes for the terminal use (a 50% increase in steel price will increase overall construction cost by 5%).

Outlook. While we are broadly upbeat on the proposed expansion plans of Westports 2, we note that these expansions are likely to dilute the medium-term profitability due to increase of financial risk from the expectation of higher concession fees and higher depreciation charges/interest expenses upon the commencement of CT10 and CT11 (expected to commence by 2025). Furthermore, we remain cautious if the yard congestion continues to prolong as the margins could be pressured with decrease in yard efficiency and increase in labour costs couple with the higher fuel costs. Nevertheless, we continue to like Westports for its long-term sustainable business model, recurring and yet growing income from ongoing throughput growth at Port Klang, leveraging on its geographical advantages.

Forecast. We cut our forecast by 7-10% for FY21-23 to account for the near term headwinds as we are imputing a more conservative assumptions as compared management’s guidance of limited impact of earnings despite congestion.

Downgrade to HOLD, with lower TP of RM4.67 (from RM4.95) based on DCFE with assumption of CoE: 7.4% as upside is limited after we cut our earnings. At current price, valuation remains fair as the stock is trading at 21.3x-22.6x FY21-23 P/E (5 year mean: 21.7x) and 4.3-4.9x FY21-23 P/B (5 years mean: 5.7x).

Source: Hong Leong Investment Bank Research - 24 Sept 2021