Investment Highlights

• Received Bill of Demands from RMC

• Negotiating for amount of settlement

• Sufficient net operating cash flow

• Maintain NEUTRAL with unchanged TP of RM3.87 per share Westports subsidiary received several Bills of Demands.

Westports’ subsidiary, Westports Malaysia Sdn Bhd received several Bill of Demands pertaining to the period between 17 July 2017 and 29 September 2017 amounting to RM59.5m from the Royal Malaysian Customs (RMC). This amount includes: (i) time barred assessments for years 2008 to 2011, (ii) import duty remittance for purchases of equipment and (iii) Goods and Services Tax for purchases made after April 2015.

Negotiating with authorities for amount of settlement. Westports is currently appealing with the relevant authorities; RMC and Ministry of Finance in order to reach an amicable settlement amount in relation to the Bill of Demands. Prior to that, the company sought additional guidance from these authorities but received an unfavourable response on 19 December 2017.

Proceedings may take a bit of time. Based on preceding cases, for instance Carlsberg Brewery Malaysia Bhd which was slapped with a Bill of Demand in September 2014, we understand that the conclusion settlement could take up to more than a year. Hence, this matter will not likely be reflected in the 4Q17 financial results.

No material impact. We reckon that the Bill of Demand of RM59.3m will not have a material impact on Westports’ day-to-day operation and financial health as the company has generated net operating cash flow of RM260m on average for the past three quarters in FY18. Meanwhile, as of 30 September 2017, Westports has a cash pile of RM429.0m and debt worth RM1.4b, translating into net debt-to-equity ratio of 0.47x.

Impact on net debt. While we note that the current share price leads to a potential upside of +11.9% which constitutes a BUY call, we maintain our NEUTRAL stance with an unchanged TP of RM3.87 based on DCF valuation (terminal growth: 3.0%, WACC: 8.5%). Our NEUTRAL stance is premised on the (i) ongoing effects of the reshuffling of Ocean Alliances and (ii) M&A activity among container liners which may continue to be a drag on its transhipment volume.

Source: MIDF Research - 21 Dec 2017