Westport 2.0

Westports Holdings announced that it has entered into a third supplemental privatisation agreement with the government and Port Klang Authority (PKA) for the proposed expansion of container terminals CT10 to CT17.

The Salient Terms Are as Follows:

a) The concession period will be extended to 31 Aug 2070 covering CT10-13. Upon Westports completing the acquisition of the third parcel of underwater land from the Selangor state government and transfer to PKA by 31 August 2045 for CT14 to CT17, the concession period will be extended to 31 Aug 2082.

b) The existing concession period ends on 31 August 2024 and continues with the new term from 1 September 2024 until 31 August 2082 for CT10 to CT17. The preliminary works for the Proposed Expansion will commence as early as January 2024.

c) Westports will incur an initial development capital expenditure of RM12.6bn for the Proposed Expansion. CT10 to CT13 is expected to cost RM6.28bn, which will be spent from 2024 until 2038, while CT14 to CT17 Is Another Development Expenditure of RM6.28bn.

d) Westports will transfer the ownership of two parcels of land to PKA. The total land and related acquisition cost amounted to approximately RM610 million.

e) Westports will pay PKA a total fixed lease rental of RM91 million per annum effective 1 September 2024. There is also a variable lease payment to PKA based on the volume handled by Westports.

f) Westports is expected to spend an overall total projected capital expenditure of RM39.6 billion over 58 years until 2082, subject to the condition stated in (a) above. It includes the replacement capital expenditure of the existing CT1 to CT9, the initial development capital expenditure of the Proposed Expansion as explained in (c) above and the projected replacement capital expenditure for the Proposed Expansion.

g) The group will fund the development capital expenditure with a combination of internally-generated funds, borrowings, dividend reinvestment and/or private placements. Westports is in the process of establishing a new RM5 billion Sukuk program to finance the Proposed Expansion.

Impact

We Revamp Our Earnings Model to Include the Followings:

a) Extension of concession to 2070 (from 2054 previously). Note that the extension to 2082 can only be recognised upon fulfilling the condition of purchasing and transferring the third land to PKA.

b) Completions of CT10 & CT11 in 2027-28 and CT12 & CT13 in 2038-39.

c) A Lumpy Repayment of RM5bn Perpetual Sukuk in 2070.

d) We now project the volume to grow at a constant rate of 2% from 2026 to 2055. Thereafter, we assume the volume to be flat from 2056 onwards when the capacity utilisation rate reaches 94%. Previously, we assumed 2% growth rate for period starting FY25 to FY35 then 0% for FY36 to FY54.

e) Total capex to be RM6.9bn for 2024-2038 for dredging and land reclamation, construction of CT10-11 and replacements of port equipment at CT1 to CT9.

f) On the dividend front, we assume the company to maintain a payout of 75% until 2070.

Overall, we are positive on this long-awaited concession agreement and the start of this multi-billion infrastructure project at Port Klang, which are so important for Westports and Malaysia to remain competitive in the region in terms of future economic growth and inflow of FDIs. In addition, the concession also provides some flexibility for Westports to expand its capacity further (CT14-17) if needed. As far as risk is concerned, we opine that concessionaires in Malaysia could usually enter into new supplemental agreements, typically for this type of long duration concession, if there are any unforeseen factors affecting the functionality of mega infrastructures in the country.

Valuation

With the change in earnings model, we raise Westports’ DDM valuation at RM4.03/share (from RM4.00 previously) based on an unchanged discount rate of 6.2%. Maintain Buy

Source: TA Research - 11 Dec 2023