KEY INVESTMENT HIGHLIGHTS

• Served notice for additional tax liabilities by Inland Revenue Board to the tune of ~RM120.60m

• IRB has concluded that the annual lease payment as not allowable for deduction

• This potential tax bill will not erode the group earnings prospects

• FY20-21F earnings maintained at this juncture

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

Tax bill from IRB. Westports Holdings Berhad (Westports) announced that its wholly-owned subsidiary, Westports Malaysia Sdn Bhd (WMSB), has been served a notice for additional tax liabilities by Inland Revenue Board (IRB). The additional tax assessment served to WMSB is to the tune of ~RM120.60m. This tax bill is in relations to; (i) total annual lease payment made by WMSB to the Port Klang Authority (PKA) amounting to RM299.90m, between 2013-2018 and; (ii) deferred revenue of RM7.96b for the year of assessment in 2018. IRB has concluded that the annual lease payment to PKA as not allowable for deduction per WMSB’s previous tax computation.

Westports disagree. That said, Westports has disclosed in its announcement that WMSB has verified their approach with both tax and legal advisors. It appears that the company has grounds to believe that IRB’s interpretation is fundamentally erroneous given its adherence to rigorous audited standard by amongst the largest professional accounting firms since 2013 with no qualification. With this, it will appeal and contest against IRB’s imposition of an additional tax assessment.

Westports can withstand the heat. Based on its past annual reports, the group annual lease payment for use of port infrastructures were circa RM55.00m a year which approximately consistent with the tax bill served by IRB. Having said that, we believe that Westports has the ability and capacity to settle the tax bill, should they need to. As of 2QFY20, the group’s cash and equivalents stood at circa RM751.90m, ~8%yoy growth, or more than 6x of the sum of the additional tax assessment. Moving forward, we posit that, the group will be allocating provisions for the tax bill which is to be added to the group financials as Westports continues to find an amicable solution to the issue with IRB.

Earnings Estimate. We postulate that the final tax bill paid to IRB, if any, will be much lower as the group strives to contest and renegotiate the total additional tax for each year of assessment. Pending further material development by Westports, we assert that this potential tax bill will not erode the group earnings prospects. Hence, we are maintaining our FY20-21F earnings estimates for now.

Target Price: We maintain our target price of RM4.03 per share as our FY20-21F earnings forecast remains unchanged at this juncture. Our target price based on our DCF valuation (terminal growth: 3.0%, WACC: 7.5%).

Maintain NEUTRAL. We are maintaining our NEUTRAL call on Westports 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 approximately 28m TEUs per annum by 2040 from the current ~14m TEUs. 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 - 6 Oct 2020