KUALA LUMPUR (April 10): With the current tariff hike for Port Klang, effective March 1, Hong Leong Investment Bank (HLIB) Research has raised its earnings forecasts for Westports Holdings Bhd for financial year ending Dec 31, 2019 (FY19) and FY20 by 5% and 3.9% respectively.
In a note today, the research house wrote that the tariff hike will immediately apply to the gateway segment, which contributes 35% of container volume, and the forecasts for earnings increase is after taking into account the higher throughput volume growth assumption of 5%, which is in line with management's latest guidance.
"Management has guided for a single-digit container throughput growth of 3% to 8% for FY19. Our forecast of 5% is at the middle of this guided range as we choose to remain at the par with management guidance," HLIB Research wrote.
"Management is confident that 5% (from 0% in FY18) transhipment throughput growth is achievable as Intra-Asia is showing decent growth. Management has guided that January and February growth are running close to double digits y-o-y for Intra-Asia segment. We believe that increase[d] Intra-Asia volume could be driven from the US-China trade war where China has redirected its trade flows with the US to Asia
"In our model, we have pencilled in 10% tariff increase for gateway segment for the full year FY19," HLIB Research added.
However, the research house noted that the new effective tariff will not apply immediately to the transhipment segment as this is based on long-term fixed contracts of three to five years.
With the proposed expansion of Container Terminal 10 (CT10) to CT19 which is targeted to complete by 2QFY19, Westports will start negotiating its concession with the Government, and the talks is expected to complete by the end of FY19.
"Construction of the wharf will start at the end of FY21 and is expected to complete by the end of FY22," said HLIB Research, adding that subsequently, the process of paving container yard will begin and conclude by the end of FY23.
The funding for this expansion will be a combination of sukuk, dividend reinvestment plan and internally generated funds, the research house added.
Currently, Westports has an utilisation rate of 68% on its current capacity of 14 million twenty-foot equivalent units (TEUs) (for CT1-CT9).
HLIB Research said the management has guided a benchmark utilisation rate of 75% for the port to operate efficiently, and they will further increase the handling capacity of CT1-CT9 by another 1 million TEUs to 15 million TEUs.
"This will be done by adding new equipment and improving workflow process of the ports," said HLIB Research, adding that additional new equipment include five new quay cranes and 15 new rubber-tyred gantry cranes (RTGCs).
The procedure will take about 1.5 years to install and will cost about RM500 million to RM600 million, said HLIB Research.
HLIB Research has maintained a "hold" call on the stock with a target price of RM3.79.
"While we like Westports for its earnings recovery prospects (driven by throughput recovery and tariff hike), we reckon that the stock is fairly valued at 22.0x and 19.6x FY19-20 PE," said the research firm.
At 10.09am, shares of Westports were unchanged at RM3.75, bringing its market capitalisation to RM12.79 billion.