Investment Highlights

• We maintain BUY on Westports Holdings with a higher fair value (FV) of RM4.27/share (RM4.03/share previously) from a rolled-forward FY24F P/E of 18x, in line with its 3-year average and a 3% premium of an unchanged 4-star ESG rating.

• The 3-month share price rally of 11% reflect investor optimism on Westports as a key beneficiary of regional nearshoring and friendshoring activities due to China+1 strategy. We understand that Westports achieved an alltime record high by handling more than 1mil TEUs in December 2023, surpassing the monthly average of 0.8mil TEUs in FY2022.

• Meanwhile, the ongoing Red Sea disruption, initiated by Yemeni’s Houthi rebels’ attacks since November 2023 on major shipping vessels, has forced shippers to halt services or redirect routes around the Cape of Good Hope in Africa.

• Following an attack on Singapore-flagged Maersk container ship in Yemen on 31 December, Maersk has halted transit through the Red Sea and Suez Canal for foreseeable future. In response, other major shipping companies like Hapag Lloyd and MSC have also chosen to cease using this route.

• The Red Sea is a vital maritime route linking the Mediterranean Sea to the Gulf of Aden. The connection established via the Suez Canal at its northern end and Bab al Mandeb Strait at the southern end provides access to the Gulf of Aden (Exhibit 1). The route holds one-third of worldwide container traffic and 40% of Asia-Europe trade.

• We assume a largely neutral impact on Westports’ container throughput volume given that 1) container traffic is still moving, unlike the Suez Canal blockade in 2021, and 2) country’s low trade dependency (8% in 2023) with Europe.

• After the Suez Canal’s 6-day blockade in March 2021 by the 20,000-TEU Ever Given container vessel, Port Klang experienced a spike in container volume a week later due to a cargo build-up of 103,900 TEUs. It is estimated the build-up is equivalent to 23 ships (4,500 TEUs per ship).

• On average, Westports handles 25.6 ships per day and is well equipped to handle more than a ship at a time. Hence, the container volume spike impact was negligible, with volume normalising in 2HFY21.

• On the contrary, Westports’ 1QFY21 financial result – the period where the Suez Canal blockade had occurred – shows that container throughput volume increased instead by 5% YoY, mainly contributed by higher transshipment and re-stowed empty units.

• To date, Asia-Europe trade contributes only 12% of the total ports’ throughput volume, positioned second behind intra-Asia, which accounts for the majority at 66%. According to Department of Statistics Malaysia, Malaysia’s latest export to European Union in November 2023 stands at 16% while import was only 7%, which mostly include luxury goods.

• Currently, no visible impact of the Red Sea disruption can be seen at the port, as guided by management. Even so, we think there may be some shipping delays as liners re-route around Cape of Good Hope, adding 14 days of transit period to 39-41 days from only 25-27 days through the Red Sea.

• Against the backdrop of shipping schedule disruptions, we expect a slightly lower port throughput in 1QFY24, followed by a recovery in 2QFY24 on a resumption of Red Sea transit. Hence, we made no changes to FY23FFY24F annual volume guidance of 6% as the quarterly fluctuation could normalise this year. The downside risk to our assumption will be a longer-than-expected Suez Canal transit pause due to escalated Houthi militant attacks, which may have rippling effects to regional ports.

• Nevertheless, we believe the recent increase in Shanghai Shipping Containerised Freight Index (SHSPSCFI) by 82% to 2,240 pts from 1,230 pts on 30 November 2023 will have negligible impact towards the region’s container volume as shippers continue moving goods and pass the additional cost to consumers. The freight index currently stands at 56% below the pandemic level high of 5,110 pts (Exhibit 2).

• On the bright side, we believe Westports will benefit from China’s growing automotive exports that surged by 62% in 2023. According to China Passenger Car Association (CPCA), China’s 2023F total auto exports could reach 5mil units (+51% YoY), substantively overtaking Japan’s 4.3 mil units as the world’s largest auto exporter. The growth is premised on Chinese automakers aggressively expanding exports to Southeast Asia, Europe and Australia. As of December 2023, Westports handled cumulative 3mil units of cars since the inception of Roll-on/Roll-off (RORO) operation.

• We are positive on Westports’ mid-to-long term outlook, underpinned by: i) Pulau Indah benefiting from supply chain shifts with more distribution and logistics factories being established in the area, ii) Stronger growth in intra-Asian trade, partially attributed to rising container volumes across China ports, despite slower-than-expected rebound this year, and iii) Westports 2.0 expansion plan to capitalise on the region's growth given the port’s strategic position in the East-West ASEAN trade routes.

• The stock is currently trading at an attractive FY24F PE of 16x, below its 5-year average of 20x, while offering compelling dividend yields of 5%.

Source: AmInvest Research - 23 Jan 2024