PETALING JAYA: The lack of certainty on the quantum and timing of much-needed regulatory terminal handling charge (THC) tariff increases could be a de-rating risk for Westports Holdings Bhd.

According to CGS-CIMB Research, this is because the tariff increases could turn out to be insufficient to adequately compensate Westports for the capital expenditure (capex) that it has allocated for its Westports 2 (W2) terminal expansion project.

It said the government and the Port Klang Authority (PKA) did not give Westports any iron-clad schedule of tariff increases.

“Hence, we cannot say for sure if Westports will earn sufficient returns from the W2 project.

“In a briefing for analysts and investors last Friday, Westports seemed to think that the government will be reasonable and should eventually grant appropriate tariff increases.

“Whether this confidence turns out to be true or not remains to be seen.

“While we expect the PKA to grant tariff increases to Westports as early as Sept 1, 2025 (and also on Sept 1, 2028), Westports needs more than two tariff increases to make the W2 project worthwhile,” the research house said.

It added that 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.

“We 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 re-entering the stock if and when the government and the PKA send the right signals to investors regarding future tariff increases,” CGS-CIMB Research said.

On Dec 8, Westports announced that it had signed the third supplemental agreement for the privatisation of Westports with the government and the PKA.

The original agreement was for a 30-year concession to operate the Westports 1 port in 1994-2024, which was previously extended for 30 years to 2054.

The new concession requires Westports to commit to building four new container terminals and increases the land lease and variable lease rental payments from Sept 1, 2024.

CGS-CIMB Research has downgraded its call to “reduce” based on the fact that Westports has already committed to building W2 phase one with a capex of at least RM6.3bil and is exposed to the risk of cost inflation and project cost overruns.

“With at least RM6.3bil in capex as guided by Westports or up to RM6.8bil, the cost of the W2 phase one capex is very significant when compared with the RM4.4bil in net book value of fixed assets and concession assets as at end-2023.

“As Westports is wholly responsible for the capex, all of the project-related risks, including that of cost inflation or cost overruns, fall squarely on its shoulders,” it explained.

The research house revised its discounted cash flow valuation of Westports lower to RM2.25, in the worst-case scenario where Westports spends all RM6.8bil on capex, but with no tariff increase.

“Westports is also seeking out new institutional or strategic shareholders to raise between RM800mil and RM1.2bil in new equity, which may result in as much as 10% expansion of the current share base,” it added.