CGS-CIMB downgrades call from HOLD to REDUCE for Westports Holdings Bhd as the research house do not have clarity on the timing and quantum of tariff hikes that are needed to pay for the heavy capex, following the group’s signing of new concession agreement.
The agreement (the Third Supplemental Agreement for the Privatisation of Westports), which was signed on Dec 8 with Malaysian government and Port Klang Authority (PKA), extended its port operatorship to 2070F, in exchange for a commitment to build W2.
Elaborating further, CGS-CIMB said the concession requires Westports to commit to building four new container terminals, i.e. CT10-13, which is Phase 1 of the ‘Westports 2’ (W2) expansion project.
This further extends the concession to operate both W1 and W2 to 2070F, or up to 2082F subject to Westports’ decision to build CT14-17
(which is Phase 2 of the W2 project); and increases the land lease and variable lease rental payments from 1 Sep 2024F onwards.
In its Company Note today (Dec 14), CGS-CIMB said its downgrade to REDUCE is premised on the fact that Westports has already committed to building W2 Phase 1 (CT10-13) with a capex of at least RM6.3 billion (CGS-CIMB pencilled-in RM6.8 billion), and (therefore) is exposed to the risk of cost inflation and project cost overruns.
The research house also expect equity dilution prior to any benefits from W2 and reduce its DCF-based TP to RM3.11 (Ke: 10%), rolling forward to end-CY24F.
It said there is no certainty about the quantum and timing of much-needed regulatory terminal handling charge (THC) tariff increases.
“As a result, we think there could be de-rating risks if the tariff increases ultimately turn out to be insufficient to adequately compensate Westports for the capex that it has already decided to spend.
“Tariff increases may also raise the ire of local manufacturers as well as local importers and exporters, as gateway boxes bear the brunt of any port tariff hikes,” it said.
CGS-CIMB added while it is wholly possible that the PKA will permit sufficiently compensatory tariff hikes over an extended period of time, it do not see why investors should stay invested at this point in time while the uncertainty still exists.
“It would seem more sensible for investors to reduce their exposure to Westports’ business risks, adopt a ‘wait and see’ approach, before reentering the stock if and when the GoM and PKA send the right signals to investors regarding future tariff increases, in our view.
It said that its DCF valuation of Westports falls to RM2.25, in the worst-case scenario where Westports spends all RM6.8 billion on capex, but no tariff increases ultimately materialise.
“Westports is also seeking out new institutional or strategic shareholders to raise between RM800 million and RM1.2 billion in new equity, which may result in as much as 10% expansion of the current share base.
The upside risks include the potential for an earlier-than-expected announcement of tariff increases; better-than-expected project cost outcome; and faster-than-expected execution of the project that may enable Westports to commission CT10 earlier than the current guidance of 2H27F.
