In our recent meeting with the management, we understand that the current haze level does not pose a threat to port operations. Besides, management revises throughput growth to 10-15% from 3- 8% previously for FY19. For Westports 2.0, the funding for Phase 1 will be financed via internally-generated funds and most likely dividend reinvestments. We raise our FY19-21 earnings projections by 4.0-4.1% and revise our future dividend payments after taking into account the future capex needed for Westports 2.0. We revise our Westports’ DDM valuation to RM3.84/share and maintain Sell on the stock.

The Haze is not alarming to Westports

As we write, the air pollution index (API) of Port Klang is at an unhealthy level of above 100. At this level, we understand from management that port operations would continue unless API has hit above 500, a level where the visibility is too low and dangerous for all vessels to continue sailing. At 700, management would start to consult with the government about temporary closure of port terminals. So, the current API reading does not affect Westports’ operations.

FY19 throughput growth 10-15%

While celebrating its 25th anniversary of port operations, Westports has refreshed it new throughput guidance to 10-15% from 3-8% previously. The new guidance was premised upon a strong performance in both transhipment and gateway volumes, which surged 21.6% and 8.9% to 3.5mn and 1.7mn TEUs for 1H19, respectively. We believe the new guidance could also serve as a good indication that the throughput would remain strong in 3Q19.

According to management, the growth in 1H19 transhipment volume was partly due to the port receiving additional services from Ocean Alliance this year. These services are all east-bound services and would likely stay with the company for next few years, in our opinion. Looking forward, management hopes to see increasing west-bound services to be called to Westports.

With regards to the 8.9% surge in gateway volume for 1H19, we observe that Malaysia external trade data, which showed 1H19 exports and imports declines of 0.2% and 1.8% YoY, failed to paint a true picture of the prospect of container volume in Port Klang as the data was dominated by commodities which are not containerised such as CPO, crude oil and LNG. For this reason, we believe Malaysia July-19 trade data, which showed export growth of 1.7% YoY and import decline of 3.6%, may not fully reflect Westports’ gateway volume growth for 3Q19. Meanwhile, we believe revenue growth of glove makers and furniture manufacturers could serve as a better indication. As such, we are generally positive on Westports’ gateway volume now as Malaysian glove and furniture manufacturers are said as benefitting from trade diversion from US-China trade war this year.

That being said, we still believe the prolong trade tension between US and China and renewed geopolitical risks after Saudi attacks will cause a global economy slowdown next year, which would not bode well for port operators. For this reason, we still stick with our assumptions that Westports’ total throughput growth to be flat versus management guidance of 3-8% for FY20.

Westports 2.0

For Westports 2.0, we understand the project scale-down from 10 to 8 terminals has taken into account cost of development, the capacity needed in the future, its current capital structure as well as dividend policy. The company is in the midst of finalising the designs of CT10-CT17 before the start of negotiations with the government on the concession terms. According to management, the company hopes to see a reasonable level of usage of local content requirements for Westports 2.0 as purchases of cranes, which can only be produced overseas, would likely sway the content requirements. In our opinion, we believe investment tax allowance could also be a part of the negotiations given the massive capex requirement of estimated RM10bn.

Phase 1 of Westports 2.0 will involve dredging works and land reclamation, which is expected to begin in 1H20. The estimated cost of RM1bn for Phase 1 will be funded via internally-generated fund and dividend reinvestments. Management does not see a need to revise its dividend policy of 75% at this juncture. However, given the massive capital needed for Westports 2.0 (est. RM10bn), we revise our future dividend payout assumptions.

Forecast

We raise our FY19-21 earnings by 4.0-4.1% after revising FY19 transhipment volume growth to 12% (from 10% previously) and gateway volume growth to 8% (from 5% previously) and maintaining FY20-21 volume growth of 0% and 3% respectively

Valuation

With the change in dividend assumptions and risk-free rate (cutting Rf to 3.5% to be consistent with our in-house forecast), we revise our Westports’ DDM valuation to RM3.84/share (from RM3.83/share previously). Maintain Sell on Westports as the share price is running ahead of its fundaments.

Source: TA Research - 24 Sept 2019