KUALA LUMPUR: Westports Holdings Bhd stock recommendation has been downgraded to "reduce" from "hold" by CGS-CIMB Securities as a lack of clarity regarding the timing and magnitude of tariff increases is important for financing substantial capital expenditures.
The firm said when Westports announced the signing of the new concession agreement last Friday, there was no mention of any proposed container regulatory terminal handling charge (THC) tariff increase.
Last Friday, Westports signed the third supplemental agreement for the privatisation of Westports with the government and the Port Klang Authority (PKA) for a 58-year extension of concession until 2082.
"Westports is unlikely to have agreed to expand the port without any tentative agreement with the government and with PKA on at least one or two rounds of tariff hikes, although this remains publicly unclear and unknown at this time," said CGS-CIMB.
PKA last raised the regulatory THC tariffs in 2015 and 2019.
For the purposes of its modelling and valuation of Westports, the firm assumed that maximum THCs will be increased as15 per cent on September 1, 2025 financial (2025F).
This will be followed by a 13 per cent increase on Sept 1, 2028 for a cumulative increase of 30 per cent; and a 15 per cent increase on Sept 1, 2035 to be followed by a 13 per cent increase on Sept 1, 2038, also for a cumulative increase of 30 per cent.
CGS-CIMB said the downgrade is premised on the fact that Westports has already committed to building Westports 2 (W2) Phase 1 (CT10-13) with a capex of at least RM6.3 billion and is exposed to the risk of cost inflation and project cost overruns.
"But there is no certainty about the quantum and timing of much-needed regulatory THC tariff increases.
"As a result, we think there could be de-rating risks if the tariff increases ultimately turn out to be insufficient to adequately compensate Westports for the capex that it has already decided to spend," it said in a note today.
CGS-CIMB said 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.
While it is possible that the PKA will permit sufficiently compensatory tariff hikes over an extended period of time, the research firm does 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 PKA send the right signals to investors regarding future tariff increases," said CGS-CIMB.
Westports is also seeking out new institutional or strategic shareholders to raise between RM800 million and RM1.2 billion in new equity, which may result in as much as 10 per cent expansion of the current share base.