Westports Holdings Bhd -
Target Price: RM2.85
Extension of Port Concession
News The Government of Malaysia (“GOM”) and Port Klang Authority (“PKA”) has agreed to extend the concession period of the privatisation agreement dated 25 July 1994 in which WPRTS has the right to develop and operate Westports for a period of 30 years until 31 Aug 2054.
The extension is subject to the fulfilment of certain conditions :1) completion and reclamation of the land and incidental works for container terminal CT6 to CT9 on or before 1 Jan 2014 and 2) completion of construction works for CT6 to be fully operational on or before 1 Jan 2014.
Comments The announcement is not a surprise to us given WPRTS’ operational excellence with better than average cargo handling efficiency in the past 10 years. In 2012, they managed to achieve a terminal utilisation rate of 76%, which is the 4th highest among global container ports.
This is positive for the company as the container terminal in Westports is the major revenue generator. It has allowed them to proceed with their expansion plans to ramp up the container throughput handling capacity in the coming years.
With regards to the conditions of extension, we believe that the second condition has been fulfilled as CT6 has been completed and it commenced operations in March 2013 whereas the first condition is more than likely to be fulfilled as the prospectus indicated that the work completion is at 91%.
Outlook We opine that the growth prospects for WPRTS remains robust with capacity expansion plans on track. Current handling capacity stands at 9.5m TEUs per annum and with CT7 coming on stream expected in 2015, capacity could be ramped up to 11.0m TEUs.
In longer term, capacity could be further increased to 16m TEUs annually if CT8 and CT9 come on stream. However, the timing and construction of the mentioned terminals are uncertain for now as it will depend on market conditions in the future.
We believe that WPRTS will still able to deliver high single-digit growth despite loss in volume due to P3 alliance in throughput in the next 3 years due to: (i) higher growth from other routes (China-Africa, China-Middle East and Intra-SEA routes), (ii) possibly higher volume per vessel calls by CMA, which implies that the volume drop for Westports may not be directly proportional to drop in vessel calls, and (iii) high efficiency of Westports with reasonable port tariffs.
Forecast We maintain our forecasts and assumptions.
Rating Maintain OUTPERFORM
Valuation Our DDM based target price is maintained at RM2.85/share with OUTRPERFORM call based on cost of equity of 7.0% and terminal growth rate of 1.3%.
Risks to Our Call (i) Delay in construction of CT7, CT8 & CT9.
(ii) Larger-than expected loss in volume due to P3 alliance.
Publish date: 23/12/13