Westports has entered into 50:50 JV agreement with Klang Port Management SB (KPM) (wholly-owned by Northport which is 99.1% owned by MMC), to acquire Boustead Cruise Centre SB (BCC) for RM230m cash excluding liabilities. BCC is a loss- making company, and we believe that the JV is acquiring BCC mainly for its 58 acres of sea-fronting lands. Our preliminary estimates suggest this acquisition to be mildly earnings dilutive. However, we are keeping our FY21E/FY22E CNP unchanged as we track the progress of the acquisition. The situation could improve with the expected full re-opening of international borders by next year. Maintain MP with a TP of RM4.20.

Acquiring Boustead Cruise Centre SB (BCC) excluding liabilities, which also holds 58 acres of sea-fronting land, for RM230m. In an announcement to Bursa Malaysia, Westports announced that it has entered into an agreement with Klang Port Management SB (KPM), a wholly-owned subsidiary of Northport (Malaysia) Bhd (Northport), which in turn is a 99.1% subsidiary of MMC Port Holdings SB (a wholly-owned subsidiary of MMC) to jointly acquire the entire 100% of Boustead Cruise Centre SB (BCC) from Boustead Holdings Bhd for a total cash of RM230m excluding liabilities, payable by Westports and KPM in a 50:50 ratio. BCC currently provides port facilities and services to cruise ships and navy vessels with its 69.8-acre facilities at Pulau Indah. BCC also owns two parcels of land with a 5-storey terminal building and a car park built thereon and another six parcels of adjacent land that has yet to be fully developed, with a total of 58 acres (market value at RM250m excluding shareholders’ loan). Westports will fund the acquisition from its internally generated funds (RM115m), and the acquisition is expected to be completed by 3QCY21.

Acquisition PBV of 0.8x. BCC is a loss-making company, and we believe that the JV is acquiring BCC for the 58 acres of sea-fronting lands with potential logistics or other complementary activities. Based on the latest available financial information, the proposed acquisition PBV works out to be at 0.8x.

Impacts to financials. BCC has been loss-making since 2015 and as a result of COVID-19 which has adversely impacted the cruise business, BCC’s loss after tax (LAT) position increased from c.RM14.7m (in FY2019) to losses of RM54.5m (unaudited FY20). As the recovery of the cruise industry is anticipated to be a protracted affair, BCC is expected to continue to be loss-making in the near term. Assuming that this 50% JV will be carried as an associate, post-acquisition, any debt, if any, in the JV will not be reflected in the consolidated balance sheet. In any case, the announcement revealed that the purchaser will not be assuming any liability post-acquisition, in which case there will be negligible immediate impact to gearing. In terms of earnings impact, we expect these acquisitions to be mildly dilutive for both the JV contribution lines in the near-term. Based on BCC’s FY20 financials, share of loss on JV is estimated at RM27.3m. Our preliminary estimates show FY22 EPS dilution of 4% which could potentially reduce our TP to RM4.05. However, we maintain our FY21E/FY22E CNP as well as our TP until the completion of the proposed acquisition. The share of JV loss could be narrowed with the expected re-opening of international borders by next year. Mindful that Westports is currently undertaking a new container terminal expansion project and further out, a RM10b capex for Westports-2 to double container capacity over 20 years, we question whether dividends may be compromised if the latest acquisition involves even more capex to develop the surrounding land. Given that BCC has been making losses even before the Covid crisis, it remains to be seen how management strategize and plan to deliver meaningful returns in the next year or two. This acquisition looks to us at best, to be a deliverer long term return.

Maintain MP with DDM-derived TP of RM4.20 based on: (i) 6.2% discounting rate, (ii) 1.5% terminal growth, and (iii) dividend pay-out policy of 75%. The saving grace is a 3.4% dividend yield.

Risks to our call include: (i) significant deterioration/improvement in container through-put, and (iii) changes in dividend policy.

Source: Kenanga Research - 22 Mar 2021