INVESTMENT HIGHLIGHTS

• Second phase of tariff hike delayed for six months

• Slight revision in quantum of tariff hike

• Revising earnings forecast downwards

• Downgrade to NEUTRAL with reduced TP of RM3.62 per share

Second phase of tariff hike delayed for six months. Westports announced that the second phase of the increase in Port Klang’s container tariff, initially scheduled for 1 September 2018 has been deferred to 1 March 2019. According to the Minister of Transport, YB Anthony Loke, the rationale behind the deferment of the tariff hike is to give more time to industry players and port users to adapt and stabilise their operations after the sales and services tax (SST) comes into effect on 1 September 2018.

Slight revision in quantum of tariff hike. Based on the company’s announcement in August 2015, the second tariff hike was supposed to entail another average approximate increase of 15%. However, the latest announcement reveals that the rate hike is happening at a lower quantum of approximately 13%. This is expected to have minimal impact on our earnings forecast as Westports is not fully able to impose higher rates immediately due to competition within the gateway segment and 1- 3 year contracts for the transhipment segment.

Impact on earnings. As we factor in the lower quantum of tariff hike and the revised period of its implementation, we are tweaking our total container revenue/TEU assumption for FY18 and FY19 to RM154.28 and RM156.53 (from: RM158.35 and RM160.55) respectively as we had initially forecasted a +15% tariff hike. Therefore, our earnings forecast is revised slightly downwards by -1.7% and -1.6% for FY18 and FY19 respectively.

Effective rate per move has traditionally been at a 65%-75% discount to the maximum tariff. According to our estimates, the past three year average effective rate per move for transhipment has been at a 65% discount while gateway at a 75% discount to the maximum tariff of RM161 and RM285 respectively mainly due to competition with other ports. As such, it is unlikely that Westports will charge their clients at the maximum rate this time around as well.

Downgrade to NEUTRAL with reduced TP of RM3.62 per share (previously RM3.69 per share) based on DCF valuation (terminal growth 1.9%, WACC: 8.5%) following the downward revision in our earnings forecast. While expansion plans for the CT10-CT19 to ramp up capacity to about 30m TEUs per annum (from 14m TEUs per annum currently) by 2040 are gradually progressing with the feasibility studies, we do not foresee any earnings accretion in the next two to four years. Moreover, current utilisation rates of its container terminals are hovering around 70% while the development of CT9 Phase 2 will only be considered upon hitting a utilisation rate ranging from 75%-85% which translates to 10.5m TEU-12.0m TEU per annum. Therefore, we are still maintaining out total container volume growth of +4.6%yoy for FY18. It is noteworthy that Port Klang still offers the lowest tariff for transhipments amongst its peers such as Port of Tanjung Pelepas and Port of Singapore at a ~10% and ~50% discount respectively even after taking into account of the second phase of tariff hike. However, we remain cautious on this matter amidst residual effects from the reshuffling of shipping alliances.

Source: MIDF Research - 13 Aug 2018