KUALA LUMPUR (Sept 23): MIDF Research has downgraded Westports Holdings Bhd to "neutral" at RM3.85 as the research house believes the port operator is trading in its fair valuation range at 20.6 times. 

The research firm also maintained its target price (TP) at RM4.03 per share following its earnings forecasts. Besides, it said its TP is based on discounted cash flow valuation (terminal growth: 3%; weighted average cost of capital [WACC]: 7.5%).

“Additionally, we opine that all the positives have been priced in at this juncture, which we believe will cap both its earnings and share price appreciation going forward. 

“That said, we continue to view Westports positively due to the lower transhipment tariffs among its peers, such as Port of Tanjung Pelepas and Port of Singapore, even after taking into account the second phase of tariff hikes in March 2019, and the extension of the Ocean Alliance to 10 years (initially five years) until 2027 will mitigate effects of the reshuffling of alliances profoundly seen in FY17 (the financial year ended Dec 31, 2017),” said MIDF in a note today.

Nevertheless, it said the contribution from intra-Asia and Asia-Europe trade lanes may face temporary downward pressure from Covid-19 in FY20. 

For the longer term, MIDF said the Westports 2 expansion plan is still expected to increase its capacity by roughly 50% to approximately 28 million twenty-foot equivalent units (TEUs) per annum by 2040. 

“This would allow Westports to compete more effectively for transhipment volumes against Ports of Singapore, which has plans to raise its capacity from around 40 million TEUs to 65 million TEUs by 2040,” MIDF noted.

The research house added that the management previously highlighted that funding sources would be a combination of a form of equity raising, such as dividend reinvestment plans or rights issues, for Phase 1 — covering container terminals 10 to 13 — followed by debt financing in later phases of Westports 2, which will take place in a later-than-scheduled period, either in FY21 or FY22, due to an expected drop in volumes in FY20.

MIDF added: “As the conclusion of the concession terms is still pending, we have yet to impute Westports 2 into our estimates. However, as we expect the concession terms to be concluded within 1HFY21 (the first half ending June 30, 2021), we will be revisiting our earnings estimates then. 

“The estimated capex (capital expenditure) [excluding Marina Land] allocated for FY20 remains unchanged in the range of RM300 million to RM400 million and has been inputed into our forecasts. The capex includes the deployment of more quay cranes and rubber tyred gantries, and the construction of a liquid bulk jetty.

MIDF also mentioned a few key risks to its "neutral" call, which include a prolonged coronavirus outbreak and any abrupt downside revision of port tariffs.

At the time of writing, shares in Westports had fallen 3.02% or 12 sen to RM3.85, valuing the group at RM13.13 billion. Some 78,000 shares changed hands.