KEY INVESTMENT HIGHLIGHTS

• Greenlight received to proceed with land acquisition

• Land acquisition is part of Westports 2 development plan

• Land reclamation works could possibly start in 1QCY21, giving a longer buffer period before commencement of wharf

• Proactive measure of planning expansion to CT10-CT17 in the span of 25 years to accommodate the long-term growth

• FY20-21F earnings maintained at this juncture

• Downgrade to NEUTRAL with an unchanged TP of RM4.03 per share

Approval from EPU. Further to its previous announcements on the acquisition of Marina Land from Pembinaan Redzai Sdn Bhd, (“PSSB”); Westports announced that it has received the approval from the Economic Planning Unit (“EPU”) to proceed with the proposed land acquisition. Recall that, the proposed land acquisition by Westports is for a total cash consideration of RM394.0m (RM25 per sqft). Westports’ Executive Chairman, Tan Sri Datuk G. Gnanalingam is also a director and substantial shareholder of PBSB. The Marina Land will complement the 154.2 acres of land previously acquired by Westports in 2018 for RM116.2m, as part of the Westports 2 expansion.

Update on Westports 2 development plan. With regards to Westports 2 development, shareholders of Westports have approved the proposed acquisition of the Marina Land of 146.4 hectares for RM394m on 5 May 2020. Other than obtaining approval from the EPU, the next steps include: (i) the conversion of category of land use, (ii) the signing of a concession agreement with the Government of Malaysia for the container terminal expansion by late December 2020. Assuming that the timeline is met, Westports would have to pay RM354.6m (the remaining 90% of the total purchase consideration) within three months after the conditions precedent has been met. Following this, land reclamation works could potentially begin in 1QCY21, giving a longer buffer period before commencement of wharf construction begins which is expected to be later in 2023. This would then followed by the delivery of cranes towards the end of CY24, enabling the operations to begin later in CY25.

Rationale for the proposed acquisition. Recall that, the proposed purchase of Marina Land is line with the Management’s strategy to undertake periodic increase in its Container Throughput (“CT”) capacity to meet the projected increase in demand. As of now, Westports’ current CT facilities, consisting of CT 1 to CT 9, is operating at a utilisation rate of approximately 77% of its terminal handling capacity which is expected to attain full utilization, in the near to medium term. To accommodate future demand growth, the management is taking proactive measures by planning the expansion of CT10-CT17 in the span of 25 years to accommodate the long-term growth for the group. As of last year, Westports handled 10.86 million TEUs of containers with proposed expansion will increase Westports capacity to reach 28 million TEUs, upon completion.

Earnings Estimate. Previously, the management highlighted that funding sources would be a combination of a form of equity raising such as dividend reinvestment plans or rights issue for phase 1 (covering container terminals 10 to 13) followed by debt financing in the later phases of Westports 2 which will take place at a later-than-scheduled period either in FY21 or FY22 (instead of FY20) due to the expected drop in volume in FY20.

As the conclusion of the concession terms are still pending, we have yet to impute Westports 2 into our estimates. However, as we are expecting the concession terms to be concluded within the 1H of FY21, we will be revisiting our earnings estimates then. The estimated capex (excluding Marina Land) allocated for FY20F remains unchanged in the range of RM300-400m and have been inputed into our forecasts. The capex includes the (i) deployment of more quay crane and Rubber Tyred Gantries; and (ii) the construction of the liquid bulk jetty.

Target Price: We maintain our target price to RM4.03 per share as maintain our earnings forecast. Our target price based on our DCF valuation (terminal growth: 3.0%, WACC: 7.5%).

Downgrade to NEUTRAL. We are downgrading our call on Westports to NEUTRAL (from BUY previously) as we believe that Westports is trading at its fair valuation range as the price is trading at 20.6x, mean level of B/F PER 2Y. Additionally, we opine that all the positives have been priced in at this juncture which we believe will cap both its earnings and share price appreciation going forward.

That said, we continue to view Westports positively due to: (i) lower transshipment tariffs amongst its peers such as Port of Tanjung Pelepas and Port of Singapore even after taking into account of the second phase of tariff hike in March 2019; and (ii) the extension of the Ocean Alliance to 10 years (initially 5 years) until 2027 will mitigate the effects from the reshuffling of alliances profoundly seen in FY17. Nevertheless, the contribution from intra-Asia and Asia-Europe trade lanes may face temporary downward pressure from the coronavirus FY20.

On a longer term horizon, Westport 2 expansion plan is still expected to increase capacity by roughly 50% to approximately 28m TEUs per annum by 2040. This would allow Westports’ to compete more effectively for transshipment volumes against Ports of Singapore which has plans to raise capacity from around 40m TEUs to 65m TEUs by 2040. Risks to our call include; (i) prolonged coronavirus outbreak and (ii) any abrupt downside revision to port tariffs.

Source: MIDF Research - 23 Sept 2020