According to an announcement from Westports Holdings Berhad (WPRTS), the container tariff revision has been approved by Ministry of Transport (MOT) and it was gazetted on 12th June 2015 and 3rd August 2015. The revised tariff will be implemented in two phases. Phase One entails an average approximate increase of 15% on key container tariff items, particularly terminal handling charges (THC), which will take effect on 1st September 2015, and another average approximate increase of 15%, which will be implemented in Phase Two on 1st September 2018. We are positive on the tariff hike with the materialization eliminating the uncertainty but the quantum of revision at 15% did not surprise us on the upside. We do not think that the higher rates will affect the competitiveness of Port Klang, but the financial impact to the transhipment segment might be staggered over a longer time period. We maintain our NEUTRAL call on the sector despite the positive catalyst as we remain concerned on the growth sustainability in view of ongoing risks.

Much-anticipated tariff hike. We are positive on the tariff hike with the materialization eliminating the uncertainty after prolonged speculations and market talks. The quantum of revision of 15% did not surprise us on the upside as we initially expected a tariff hike of 10%-20%. However, we are encouraged by the announcement of the subsequent phase of tariff hike, which will provide further visibility to the potential growth over the longer term for the port operators in Port Klang, namely WPRTS and NCB. Note that the last revision of the key container tariff items at Port Klang was about 14 years ago.

Volume growth undeterred. Current tariff ceiling rates in Port Klang for transhipment and gateway (import/export) are RM140/TEU and RM230/TEU, respectively, while the new tariff is estimated to lift the rates to RM160 and RM265, respectively. Nonetheless, we do not think that the higher charges in Port Klang would deter or push the customers disembarking in Port Klang to other ports as: (i) efficiency and location are the prioritized over pricing for shipping companies, and (ii) the revised rates are still 30%-50% cheaper than the rates neighbouring competitors are charging, partly due to the weakening MYR.

Immediate impact to gateway. We understand that the new rates in the gateway segment will be adjusted and charged to its customers on the implementation date, which is 1st September 2015. However, the impact from the tariff hike to the transhipment segment might be staggered over a longer time period in order for renegotiation with shipping companies upon the expiry of respective contracts. We imputed the new tariff rates into our earnings model, resulting in 3.5% and 16.1% upward revision of WPRTS net profits in FY15E and FY16E, respectively, while NCB’s FY15E and FY16E net profits were lifted by 6.3% and 19.6%, respectively.

Reiterate NEUTRAL on the Shipping & Ports sector. Despite the much-anticipated tariff hike coming to fruition, we are still keeping our neutral view on the sector. The risks and concerns that are stopping us from upgrading the sector includes: (i) persistently weak trade volume (1H15 trade down 2.9% YoY) which might drag down the throughput growth due to a slowdown in China economy, weak oil prices as well as GST implementation, (ii) competition might intensify as both port operators are expanding their capacity, and (iii) market might have overplayed the tariff hike excitement by expecting a higher quantum of tariff hike, which had resulted in a sharp rise of share prices (26%-83%), thus lesser upside from current valuation despite the upgrade in earnings.

Our top pick of the sector is MISC (OP; TP: RM9.26) as we like its solid earnings growth over the next two years and also healthy balance sheet position, which frees up room for the group to explore investment opportunities. We also like BIPORT (OP: TP: RM8.08) for the long-term prospect over the Samalaju port. Meanwhile, we upgrade WPRTS to MP from UP with higher TP of RM4.52 (from RM3.99) based on unchanged DDM valuation. We like the company for its continuous improvement in efficiency and capacity expansion plan moving forward but think that its valuation is less compelling with last closing price implying 22.7x PER FY16E and 3.3% in dividend yield. We downgrade NCB to UP from MP with higher TP of RM4.05 (from RM3.65) correspondingly with the earnings upgrade, but based on unchanged 1.3x PBV FY16E, in line with +0.5 SD over the 5-year mean. Share price performance was strong with 83% YTD gain, which was probably driven by M&A with shareholder MMC Corp increasing its holding stake. However, we keep our valuation yardstick unchanged as we think that the chance of a General Offer (GO) is low in view of MMC Corp’s high gearing, and thus the share price might normalize to match its fundamental. 

Source: Kenanga Research - 7 Aug 2015