Container Tariffs Deferred

We are mildly disappointed over the container tariff deferment by 6 months, though the impact is minimal. However, we take the opportunity to downgrade Westports to a HOLD given the recent impressive share price performance, fairly reflecting its immediate prospects ahead. Our DCF-based 12-month TP is lowered to RM4.01 in tandem with lower earnings as valuations are rolled over to 2019E.

Deferment Allows for Easing Business Conditions

Westports announced that the Port Klang Authority (PKA) has deferred the impending container tariff revision by 6 months to 1 Mar 2019 instead of 1 Sep 2018. On average, tariffs were slated for a 13% increase. Aside from the previous tariff hike of a similar quantum in Nov 2015, the last revision stretched back to 2001. Transport Minister Anthony Loke’s rationale for the deferment was to allow port users and other industry players to adapt and stabilize their businesses following the implementation of the sales and services tax (SST) come Sep 2018.

Mildly Disappointed With Minimal Impact to Earnings

We are mildly taken aback by the deferment as we had expected the implementation according to the initial timeline. Although the official tariffs are raised on average by 13%, for both gateway and transhipment cargoes, only the higher gateway tariffs will be enjoyed by Westports in reality. Contracts for transhipment cargo are negotiated directly with the shipping liners and are market driven by regional competing ports. In contrast, gateway cargo is captive necessary shipment to a particular port. Therefore, we revise our gateway cargo tariffs following the delay in tariff revision. Aside from that, we take the opportunity to dial back our cargo volume assumption which was previously too optimistic. It subsequently lowers our FY18/19/20E earnings estimates by -7.3/-7.7/-4.8%.

Downgrade to HOLD But at a Higher DCF-derived TP of RM4.01

We downgrade our recommendation on Westports to a HOLD from a Buy following the impressive surge in its share price over the past 1 and 3 month. After trimming our earnings, we derive a lower DCF-based TP of RM4.01 (RM4.10 previously) despite rolling over our valuations to 2019E. We believe Westports valuations which is trading at its historical PE mean, is fairly reflective of its prospects ahead. The feasibility study on Westports 2 emerging by late 2018 should draw interest, but it may be dampened by lingering concerns over global trade. Key downside risks include (i) lower exports growth and (ii) higher fuel costs. Upside risk include (i) hostility over global trade unwinding and (ii) robust transhipment volume growth.

Source: Affin Hwang Research - 13 Aug 2018