News  Westports Holdings Bhd (WPRTS) had on 26 June 2014 received the Notice from Port Klang Authority (PKA) agreeing to the extension of the concession period from 1 Sep 2024 to 31 Aug 2054 subject to the terms and conditions as set out in the privatisation agreement dated 25 Jul 1994 and supplemental agreements executed thereafter, between the Government of Malaysia, PKA and WPRTS.

Comments  The announcement was not a surprise to us as WPRTS has completed the necessary capacity expansions as per preset conditions; for instance the completion of CT6 and land reclamation works for CT7, CT8 and CT9 as pre-conditions for the concession extension.

 This is definitely a positive announcement for WPRTS as it improves the earnings visibility of the group with assurance of operations over the next 40 years.

Outlook  We opine that the growth prospects for WPRTS remains robust with capacity expansion plans on track. Current handling stands at 9.5m TEUs per annum

 With CT7 coming on stream, which is expected in 2015, capacity could be ramped up to 11.0m TEUs.

 In longer term, capacity could be further increased to 16m TEUs annually if CT8 and CT9 come on stream. However, the timing and construction of the mentioned terminals are uncertain for now as it will depend on market conditions in the future.

 We believe this is a prudent approach by the management to avoid overexpansion which will reduce the profitability of the group.

 The P3 alliance hit a roadblock with China rejecting the proposal on the grounds of potential competition elimination and restriction in the market post the implementation of the mega alliance. This was a positive surprise to us as we have factored in loss of 200,000 TEUs of transhipment traffic, which accounts for 3.0% of total container traffic achieved in FY13.

Forecast  We maintain our forecasts and assumptions for now as we have earlier factored in a minimal adverse impact on container throughput by P3 alliance as the Asia-Europe market which is P3-related is already on a declining trend while other non-P3 routes are growing at a faster pace.

Rating  Maintain OUTPERFORM

Valuation  Our DDM-based target price has been increased from RM2.91/share to RM3.13/share as we rolled over our 2-stage DDM model to CY15 (cost of equity: 6.99%, g: 1.25%).

Risks to Our Call  (i) Delay in construction of CT7.

(ii) Higher-than-expected cost of operations.

Source: Kenanga