WRPTS has inked an agreement with the federal government and Port Klang authority (PKA) governing the development of container terminals (CTs) 10 to 17, which also entails the extension of the port operation concession by 58 years to 2082. We are positive as this has significantly reduced its business continuity risk. We maintain our forecast, TP of RM3.80 and OUTPERFORM call.

After much delay, WPRTS has finally signed a Third Supplemental Privatisation Agreement with the federal government and PKA governing the development of CTs 10 to 17, which also entails the extension of the port operation concession for both existing facilities (i.e. CTs 1 to 9) and new facilities (i.e. CTs 10 to 17) by 58 years from Sep 2024 to Aug 2082.

Capex and project details. Initial development capex is up to RM12.6b with RM6.3b for each phase - Phase 1 for CT10-13 (2024-2038) and phase 2 for CT14-17 (2036-2053). The new CTs are expected to nearly double its capacity to 27m TEUs from 14m TEUs, spread over 26 years. Specifically, CT10 will commence operations by 2HCY27, and CT11 by 2HCY29, while each CT will add capacity up to 2m TEUs to the existing 14m TEUs. Total projected capex is up to RM39.6b until 2082 for the expansion of Westports 2 (CT 10-17) at RM12.6b, land-related costs at RM2b, with the balance for replacement and maintenance capex.

Financing. The initial capex will be financed by: (i) internally generated funds, (ii) new RM5b Wakalah shariah principle SRI Sukuk programme, (iii) equity injection (RM800m to RM1.2b) via dividend reinvestment, share placements or strategic investor by 2027, and (iv) remaining existing Sukuk of RM850m until full redemption in 2028.

Impact to earnings. WPRTS indicated that the impact to its net profits for the next 2 years could be minimal. They will be utilising existing financing facility and not redeem the Sukuk early. Concurrently, under the new concession agreement, there is an increase in lease payments by 40% to RM91m from the current RM64m, In our view, this will be netted off against: (i) lower depreciation cost (longer concession period), and (ii) rental income from the new land and building. On the bright side, any future lease rate hike will be in line with the container tariff revision rate.

Additionally, WPRTS has a 10-year Investment Tax Allowance (ITA) from 1st January 2022 to 31st December 2031 for the capex utilised for the development with an estimated average effective tax rate of 18% to 21% for 2024-2028. With anticipated full completion only by 2053, we view this investment as a very long-term play for the group, thus ruling out any earnings accretive development over the next few years.

Forecasts. Maintained

Valuations. We also maintain our DCF-derived TP of RM3.80 which is based on a discount rate equivalent to its WACC of 6.1% and a terminal growth rate of 2%. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We continue to like WPRTS for: (i) its resilient earnings underpinned by long-term contracts with key clients such as Ocean Alliance, (ii) its long-term growth prospect driven by the Westports 2 expansion plan, and (iii) its price competitiveness, i.e. lower transhipment tariffs vs. peers such as Port of Tanjung Pelepas and Port of Singapore. Maintain OUTPERFORM.

Risks to our call include: (i) a significant slowdown in the global economy, dampening the global containerised trade traffic, (ii) rising operating costs, particularly fuel, and (iii) its expansion plans fail to materialise.

Source: Kenanga Research - 11 Dec 2023