Westports Holdings Bhd is still hanging in the balance, as there is uncertainty on the quantum and timing of tariff increases that the government will permit for the port operator.
Therefore, CGS-CIMB reiterated its REDUCE call until there is more certainty. It also tweaked its end-CY24 discounted cash flow (DCF)-based target price (TP) slightly higher to RM3.13, based on unchanged cost of equity of 10%.
However, the research house said Westports has started the process for a container tariff increase, which it hopes to begin levying in 2H24F.
“The support of the Port Klang Authority (PKA) has already been secured and approval from the Ministry of Transport will be sought after engaging with stakeholders, such as shipping lines.
“Westports says it needs the tariff hikes to cover inflation, to close the gap with regional ports, such as Jakarta and Manila, where tariff are more than 50% higher per Westports, and to pay for the Phase 2 expansion project,” it said in its Results Note today (Feb 5).
CGS-CIMB said it has pencilled in a 15% tariff hike on 1 Sep 2025F and another 13% on 1 Sep 2028F.
“A potential upside risk is Westports securing higher rates and/or rates are implemented sooner. For now, we recommend investors to exercise caution as there is no guarantee that the government will permit the required tariff increases that will make capex heavy Phase 2 viable, which is a de-rating catalyst,” it said.
On the group’s financial results for the fourth quarter ended Dec 31, 2023 (4Q23), its FY23 core net profit of RM756 million was 1.4% below the research house’s expectations due to a quarter-on-quarter (QoQ) drop in Value Added Services (VAS) revenues for the quarter.
“FY23 benefitted from volume growth and lower taxes. 4Q23 core net profit of RM194 million was flattish relative to 3Q23.
“On the positive side, Westports enjoyed a robust container volume rise of 3.2% QoQ, or an increase of 11% YoY, in 4Q23, which may be due to a pre-Lunar New Year crunch,
“Besides that, and conventional port revenues rose 18% QoQ as a liquid bulk customer rushed to meet its minimum annual volume commitment to Westports.
“On the other hand, a qoq decline in VAS revenues dragged down unit container revenues by 3% QoQ while fuel costs rose QoQ due to higher port volumes,” CGS-CIMB said.
It added Westports’ core net profit for FY23 was 13% higher YoY due in part to the container volume growth and also because of the once-off imposition of the Prosperity Tax in FY22.
CGS-CIMB said it expected gateway volume growth to remain robust in FY24F.
“Container volumes grew 8.2% YoY in FY23, much higher than Westports’ guidance of 0% to 5% growth at the start of last year.
“Transhipment volumes rose 4.4% YoY in FY23 while gateway rose a strong 14% YoY as Chinese wastepaper recycling and solar panel factories relocated to Malaysia. Gateway boxes comprised 41.6% of total volumes in FY23, up from 33.3% in FY19.
The research house said Westports is guiding for a ‘low single-digit’ increase in container volumes for FY24F, claiming that the Malaysian ban on Israeli-liner Zim from docking at Westports since late-Dec 2023 will result in the loss of transhipment volumes amounting to 2% of its total container traffic.
“Nevertheless, we pencil in 5% container volume growth in FY24F, forecasting 4% increase in transhipment and 6% increase for gateway, to take into account historical management under-guidance,” it added.
