INVESTMENT HIGHLIGHTS

• Approval granted for CT10-CT19

• Pleasantly surprised by the announcement

• Westports could have a capacity of 30m once complete

• We are expecting FY18 to be better

• Maintain NEUTRAL with unchanged TP of RM3.98 .3

Approval granted for CT10-CT19. Westports announced on Bursa Malaysia that it has received an Approval-in-Principle from the Government of Malaysia (GOM), to expand its container terminal facilities from Container Terminal 10 (CT10) to Container Terminal 19 (CT19). Currently, Westports is allowed to expand up to CT9.

Pleasantly surprised by the announcement. While we understood that Westports was in talks with the GOM regarding the extension, we did not expect the approval to be granted so soon (albeit only in principal). The approval could also pave the way for Westports to seek an extension to its concession period which currently runs until 2054, considering that CT19 might only be fully completed by ~2030, in our view.

Westports could have a capacity of 30m TEU once complete. The expansion of its container terminals up to CT19 could take place over the next 10 years, with total container handling capacity potentially almost doubling from 16m TEU (after the completion of CT9 phase 2 by FY18) to 30m TEU. Once complete, it would allow Westports to compete more effectively against the Port of Singapore (PSA) which has plans to raise its capacity from ~45m TEU to 65m TEU by 2027. Recall that among others, PSA’s large excess capacity was one of the reasons CMA CGM decided to use it as a primary SEA hub to avoid port congestion.

Not being side-lined. Meanwhile, the approval allays concerns that Westports is being side-lined in favour of the Pulau Carey Southern Island mega port project which could be a longer term project. While land reclamation is required for Westports’ CT10-CT19 expansion, its natural breakwater and deep water depth reduces the need for considerable construction and dredging works which are costly. However, our earnings forecast remain unchanged pending further clarity on the timeline of its CT10-CT19 expansion plans.

We are expecting FY18 to be better. The management of Westports now believes that FY17’s overall container throughput could decline between -7% and -12%yoy, before flattening out in 1QFY18 and returning to growth from 2QFY18 onwards. We are slightly more optimistic, forecasting a -4.2%yoy decline in throughput volume in FY17 and a growth of +7%yoy in FY18. Our slightly more upbeat view hinges on continued strength in external trade and an improvement in global container shipping demand. Apart from that, Westports could benefit from service updates carried out by shipping alliances, having expanded its container handling capacity via CT8 and CT9 phase 1.

Maintain NEUTRAL with unchanged TP of RM3.98 based on DCF valuation (terminal growth: 2.5%, WACC: 8.5%). Despite the positive developments, we leave our target price unchanged for now, pending further clarity on Westports’ plans for CT10-CT19. The formation of the Ocean Alliance, while larger than the O3 Alliance in capacity is adopting a dual-hub strategy in the Straits of Malacca (previously: a single hub at Westports), causing Westports to cede a portion of its transhipment cargo to PSA. In addition, UASC has shifted out its transhipment containers following its acquisition by Hapag-Lloyd. That said, Westports offers one of the cheapest container handling tariffs on the Strait. Coupled with its ability to expand its facilities up to CT19, Westports stands a fair chance of regaining some of its losses in volume as it improves its container handling efficiency.

Source: MIDF Research - 28 Aug 2017