Last Friday, WPRTS announced that the container tariffs hike has been postponed to Mar 2019 from Sep 2018. While this would have an immediate adverse impact towards FY18 earnings, we believe this still represents the new government’s willingness in embracing the tariff hike. Overall, no changes to FY18E earnings as we have yet to impute the tariff hike previously, but FY19E earnings upped by 7% after accounting for the tariff hike. Maintain MARKET PEFORM, with TP of RM3.75.

Postponement in tariff hike. Last Friday, WPRTS announced that it had received a letter from the Port Klang Authority (dated 9 August 2018) that the implementation of Phase Two of the revised container tariff would only take effect on 1 March 2019, instead of 1 September 2018 as previously gazetted. Phase Two would supposedly see an approximate average increase of 13% from current tariff rates.

Further backstory on the tariff hike: Recall that on 6 August 2015, the company announced that the container tariff revision had been approved by the Ministry of Transport, and will be implemented in two phases. Phase One came into effect on 1 November 2015 after being postponed twice (first from 1 September 2015 to 1 October 2015, then to 1 November 2015), which saw an approximate average of 15% increase in tariff rates. Prior to this, the previous tariff hike was around 2001.

Impact on the postponed tariff hike. Based on our understanding, the tariff hikes will effectively only affect gateway containers, as transhipment containers would still have to be priced competitively to rival other regional transhipment ports in order to sustain market share. In 2Q18, gateway constitutes roughly 36% of WPRTS’ total container throughput. Overall, while the delay would have an immediate adverse impact towards FY18 earnings, the positive takeaway from this is that it does represent the new government’s willingness in embracing the tariff hike. We believe the postponement is seen as mostly to avoid coinciding with the implementation of SST, and thus, allowing businesses additional time to adapt to the price increase along their supply chain.

Our earnings forecasts. All-in, we made no changes to our FY18E earnings, as we have yet to factor in the tariff hike into our assumptions previously. However, we are revising our FY19E earnings by +7% after taking into account the March 2019 implementation date of the tariff hikes. Note that our earnings forecast numbers are based on the assumption of 3-5% container throughput growth for FY18-19. Furthermore, note that from this point onwards, any further deferment of the implementation date would warrant a downgrade in our FY19E numbers.

Maintain MARKET PERFORM. Following the FY19E earnings upgrade, our DDM-derived TP is also subsequently raised to RM3.75 (from RM3.50 previously), based on these assumptions; (i) 6.2% discount rate, (ii) 1% terminal growth, and (iii) unchanged dividend policy of 75% pay-out. Risks to our call include: (i) lower-than-expected container throughput growth, (ii) delay in implementation of tariff hikes, and (iii) any changes in dividend pay-out policy.

Source: Kenanga Research - 13 Aug 2018