Westports Holdings - Call At This Port

Date: 15/11/2013

Source  :  RHB
Stock  :  WPRTS       Price Target  :  2.84      |      Price Call  :  BUY
        Last Price  :  3.72      |      Upside/Downside  :  -0.88 (23.66%)

Via  Westports,  investors  can  participate  in  South-East  Asia’s accelerating  trading  activities.  With  core  net  profit  potentially expanding  at  a  CAGR  of  4.6%  over  FY12-15F,  the  port  operator  is deemed  as  a  cash  cow  that  will  deliver  an  average  annual  FCF  of MYR484m  over  FY14F-18F.  We  initiate  coverage  on  the  stock  with  a BUY. Our DCF-based FV of MYR2.84 is premised on a 7.12% WACC.

  • A leader in  Port Klang. Wesports  offers investors a unique opportunity to participate in the heightening trade activities in South-East Asia (SEA).The port’s strategic  location allows the company to  capitalize on  strong trade  growth in SEA. Drewry  Research  expects container throughput in SEA to grow 6.0% annually over FY12-15 vs global troughput’s 5.5%.
  • The P3 alliance.  The P3 alliance is a collaboration between three of the biggest  container  liner  companies,  of  whom  one  is  CMA  CGM, Westports’  biggest  customer.  The  alliance  may  be  a  key  risk  for Westports  as  transhipment  boxes  could  be  diverted  to  PTP,  the alliance’s  transhipment  hub.  We  understand  that  CMA  CGM  has committed  an  annual  capacity  of  600k  twenty-foot  equivalent  units (TEUs) to the P3 alliance. We are of the view that out of this, 400k TEUs will be diverted  annually  from Westports and the remaining 200k TEUs from other transshipment hubs. We estimate tha t volume loss from this alliance may make up 2-5% of total volume.
  • Core  net  profit  growth  of  4.6%  over  FY12-15F.  We  forecast FY13F/14F/15F  core  earnings  at  MYR456m/474m/478m  respectively, buoyed  by  higher  container  throughput  –  which  would  result  in economies of scale  -  and margin expansion. This will imply a 4.6% core net profit CAGR over FY12-15F. The potential revision of the upper band in container tariffs would be a key catalyst to earnings.
  • Initiate  coverage  with  a  BUY.  Our  DCF-based  FV  for  Westports  of MYR2.84  is  premised at a 7.12% WACC. As the company is capable of generating  an  average  annual  FCF  of  MYR484m  for  FY13F-15F,  it  is able  to  commit  to  a  75%  dividend  payout  policy,  which  translates  to yields of 4.1% for FY14F-15F. Our FV of MYR2.84 implies a FY14 P/E of 23x  and EV/EBITDA of  14.2x.  Westports has the highest dividend yield of 4.1% among Malaysian port operators. 

Executive Summary

Leading port operator at Port Klang. Westports, one of the leading port operators along the Straits of Malacca, offers investors a unique opportunity to participate in the growing  pace  of  trade  activities  in  SEA.  It is one of  the  two  port  operators at  Port Klang besides Northport,  a Bursa  Malaysia-listed port operator  under the entity NCB Holdings (NCB MK, NEUTRAL, FV: MYR3.50).  Port Klang is one of  the world’s 15 busiest  ports  by  container  throughput,  serving  as  a  key  transhipment  hub  in  the Straits  of  Malacca  and  as  a  main  gateway  for  import/export  cargo  for  Peninsular Malaysia.

Westports’  throughput  growth  outpaces  growth  at  Port  Klang.  Port  Klang  has registered  strong container throughput growth, registering a 8.3% CAGR from 2002 to 2012, in line with the 8.3% global growth projected by Drewry in the same period. Port Klang’s growth was primarily driven by transhipment cargo, which saw a 10.0% CAGR  from  2002  to  2012  versus  5.8%  for  import/export  cargo.  Over  the  same period, Westports managed to grow its container volume at a faster rate of 13.2%, thanks to growth from key customers and high operating efficiency. Overall, its share of container throughput at Port Klang rose from 39% in 2001 to 69% in 2012. Strategic  location  to  benefit  from  higher  trade  activities.  Westports  is  well positioned along the main trade lane in the  Straits of Malacca and is exposed to the Asia-Europe and intra-Asia trade lanes. The port’s strategic location allows Westports to  capture  the  strong  trade  growth  in  South-East  Asia  (SEA).  Drewry  expects container throughput in SEA to grow 6.0% annually over FY12-FY15 versus 5.5% for global throughput.

Efficient  cost  management.  Westports  believes  it  has  one  of  the  highest  port productivity in the world, consistently achieving 35 moves per hour (mph) for vessels longer  than  300  metres.  According  to  Drewry,  Westports achieved  169,271 moves per crane per year in 2011, ahead of other big names in the same trade lane such as PSA and PTP. Westports’ EBITDA margins are also among the highest in the region. Far East and SEA  markets to propel container growth.  The  rise of the emerging economies and the trend in outsourcing production lines have led to improved global trade  flows  across  all  transport  modes.  The  increasing  demand  for  the containerisation of manufacturing products and goods has also expanded across a wider spectrum due to its convenience and cost effectiveness in terms of time and costs. The rising importance of Asia’s economies as global manufacturers of a wide range of products and merchandise  –  thanks to their cheaper cost of production  – has  made  the  Far  East  a  leader  in  container  throughput,  accounting  for approximately 39% of the global container trade share, according to Drewry. Of this 
share, China alone accounts for 67% of the traffic from the Far East, or equivalent to 26% of the total global trade in 2011. SEA, meanwhile, accounts for 14% of global container trade  –  a level  that  this  region  has managed to maintain  since  the early 90s. Drewry projects that global container throughput would grow by 5.5% annually from  2012  to  2015,  mostly  driven  by  the  Far  East  and  SEA  markets.  These  two regions  will  contribute  to  the  bulk  of  the  TEU  throughput  when  compared  to  other regions, due to their stronger economic growth prospects.

Straits of Malacca the world’s busiest trade lane. As the Straits of Malacca region - which comprises neighbouring SEA countries ie Thailand, Indonesia, Singapore and Malaysia  -  is at a key crossroad for container liners, it is a favourite port of call for transhipment  activities.  It  is  also  one  of  the  busiest  waterways  in  the  world,  as  an estimated  30%  of  global  goods  and  80%  of  Japan’s  oil  needs  pass  through  the channel,  according  to  the  US  Energy  Information  Administration  (EIA).  With  some 50,000  vessels  plying  this  route  annually,  it  serves  as  the  main  line  for  the Transpacific and Europe-Far East routes, as well as the Intra-Asia and Intra SouthEast  Asia  routes.  According  to  Drewry,  container  volume  in  the  straits  area  has grown at a CAGR of 11% since 1990, outpacing the global CAGR of 9.5%.

Westports’  growing momentum.  Since Westports commenced operations in 1996, container  throughput  (both  gateway  and  transhipments)  has  been  chalking  up  a CAGR of more than 11% according to Drewry. The throughput growth was boosted by  aggressive  efforts  to  ramp  up  capacity  to  meet  its  target  for  high  transhipment volume,  which  currently  accounts  for  72%  of  the  port’s  total  volume.  Westports’ efficient throughput handling, which ranks fairly high in terms of crane productivity, has made the terminal a preferred port of call for transhipment  cargo in the Straits of Malacca.  Its  ability  to  generate  high  transhipment  volume  has  also  allowed  it  to garner  a  bigger  market  share  of  Port  Klang’s  total  throughput  at  69%  (Northport: 31%). As Port Klang is a national load gateway for indigenous trade, this gives liners more incentive to make Westports the preferred port of call. Its efficient throughput handling capability and highly accommodative modern port infrastructure allows  it to support vessels with capacities of up to 18,000 TEUs.

Westports  offers  the  more  flexibility  to  liners.  Although  Northport  is  viewed  as Westports'  closest  competitor,  the  latter  has  an  acclaimed  crane  productivity  track record  in  container  handling,  according  to  Drewry.  However,  Westports  does  not directly  compete  for  volume  with  Northport.  Instead,  its  immediate  competitors  are PTP and PSA. While the latter two are close to Westports'  efficiency  (measured by crane productivity), only the latter can offer customers the benefit of efficient handling capability  coupled  with  its  lower  pricing  per  TEU.  Furthermore,  as  Westports  is situated in Port Klang, this also gives liners an incentive to call at the port, given its higher number of container exchanges per call - from its direct services in addition to transhipment boxes.  However,  as  both  PTP  and  PSA  are expanding  their  terminal capacities moving forward, we cannot ignore the  fact that the race to grow  market share will get more competitive.

P3  alliance  is  a  key  risk.   The  P3  alliance  is  a  collaborative  agreement  between three  of  the  biggest  container  liner  companies:  Maersk,  Mediterranean  Shipping Company  (MSC)  and  CMA  CGM.  CMA  CGM  is  Westports  biggest  customer, accounting for 36% of the latter’s total container throughput handled in FY12. The P3 alliance,  which  is  expected  to  begin  in  June  2014,  could  pose  as  a  key  risk  for Westports,  as  transhipment  boxes  could  be  diverted  to  PTP,  the  alliance’s transhipment  hub.   We  understand  from  management  that  CMA  CGM  contributed about  2.5m  TEUs  to  Westports  in  2012,  of  which  1m  TEUs  could  potentially  be exposed  to  the  P3  routes.  The  P3  service  routing  announced  by  CMA  CGM,  if implemented, will result in a revision of port calls  -  Port Klang’s weekly service calls will  be  reduced  to  six  from  10  out  of  the  26  proposed  for  the  AsiaEurope/Mediterranean  trade  lanes. We have  factored  this  impact  into  our  earnings model, where we expect the number of boxes diverted from Westports to PTP to be as  much  as  200k  TEUs  worth  in  FY14F  and  400k  TEUs  annually  from  FY15F onwards. As  CMA CGM has committed to an annual total capacity of 600k TEUs to P3,  we think our assumption of 400k TEUs being diverted away from Westports is fair. The remaining 200k TEUs will be  lost by other  ports. Other risks include: i) high customer concentration; ii) a lack of cost  flexibility as the majority of port workers are directly  hired;  iii)  a  slowing  global  economy,  which  may  affect  Port  Klang’s throughput, especially for Asia-Europe routes; and iv) intense competition from PSA and PTP.

Solid  throughput  growth.  We  conservatively  expect  Westports  to  achieve  a container  throughput  CAGR  of  4.8%  for  FY12-15F.  This  is  lower  than  Drewry’s projection of 6.0% for SEA for FY12-15F and its historical 8.6% CAGR for FY08-12. We  believe Westports  will  see  slower  volume  growth  in  FY14F  due  to  the  loss  of TEUs  diverted  to  PTP  upon  the  commencement  of  the  upcoming  P3  alliance,  if approved by regulators. We also forecast that revenue from container value-added services to grow at a 12.1% CAGR over FY12-15F as Westports attempts to beef up ancillary income. We expect bulk throughput to grow  at a  6.0% CAGR over FY12-15F.Core net profit CAGR of 4.6% over FY12-15F. We are forecasting FY13F/14F/15F core net earnings at MYR456m/474m/478m respectively, buoyed by higher container throughput (which leads to economies of scale) and margin expansion. This implies a 4.6%  core  net  profit  CAGR  for  FY12-15F.  A  revision  in  the  upper  band  of  the container tariff would  be a major catalyst to  lift earnings. Note that  container tariffs have not been revised over the past three decades.

Initiate coverage with a BUY. We value Westports with a DCF approach to derive a FV  of  MYR2.84,  premised  at  a  7.12%  WACC  (see  valuation  table  overleaf).  The company is committed to a 75% dividend payout policy, which translates   to dividend yields  of 4.1% for FY14-15F.  Our FV of  MYR2.84 implies a FY14 P/E of 22.7x and EV/EBITDA of  14.2x,  which is at a premium to its peer  average of 14.5x and  8.9x respectively. This is justifiable given  its  status as the only listed transhipment port in Asean.  Additonally,  Westports  has  a  high  EBITDA  margin  of  53%  and  has  the highest dividend yield of 4.1% among Malaysia’s listed port operators.

Investment Merits
Leading port operator at Port Klang with a 69% market share Westports,  one  of  the  leading  port  operators  along  the  Straits  of  Malacca,  offers investors a unique opportunity to participate in the growing pace of trade activities in SEA.  It  is  one  of  the  two  port  operators  at  Port  Klang  besides  Northport,  also  a Bursa-listed port operator. According  to Drewry, Port Klang as a whole  is among the world’s 15 busiest ports by container throughput, serving as a key transhipment hub in  the  Straits  of  Malacca  and  as  a  main  gateway  for  import/export  cargo  for Peninsular Malaysia.

Westports’  throughput  growth  outpaces  growth  at  Port  Klang.  According  to historical  data  compiled  by  Drewry,  Port  Klang  has  been  experiencing  strong container throughput growth, registering a 8.3% CAGR in 2002-2012. This is in line with the 8.3% global growth projected by Drewry for the same period. Port Klang’s growth was primarily driven by transhipment cargo, which saw a 10.0% CAGR from 2002 to 2012 versus 5.8% for import/export cargo. Over the same period, Westports managed  to  grow  its container  volume  at  a faster  rate  of 13.2%,  thanks  to  growth from key customers and  its  high operating efficiency. Overall, its share of container throughput at Port Klang rose from 39% in 2001 to 69% in 2012.

Source: RHB

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