Cautiously Optimistic On Increased Port Calls

Westports continues to sustain its transhipment market share while outperforming in gateway volumes. Potential catalysts are emerging, as its key customers have upgraded their port calls on increased market demand. However, uncertainties on the economy and global trade wars remain. We prefer a wait-and-see approach till the 2Q18 results, so that more clarity can be gained on volume growth from May 17’s base. Maintain HOLD. Target price: RM3.35. Entry price: RM3.10.

WHAT’S NEW

• Sustaining market share. The following can be observed from Westports Holdings’ (Westports) 1Q18 ports statistics: a) Port Klang’s -9% volume growth arose from declines from both Westports and Northport (of -7% and -14% yoy respectively), b) PSA Singapore and Port of Tanjung Pelepas (PTP) showed strong volume growth of 9% and 10% respectively, c) Westports’ container/transhipment-only market share in the Straits of Malacca (SOM) is at 16.1% (sustained from 2Q17 but down from 1Q17’s 19%), d) Westports’ market share among the 10 Malaysia ports is at 37.4% (sustainable levels from 2Q17 but a decline from 1Q17’s 40%). In short, we note that the transhipment volumes in the SOM region had been steadily increasing to 14m TEUs in 1Q18, and Westports managed to sustain its market share after transitioning to a lower transhipment volume base effective May 17 due to the alliance realignments.
• Gateway outperformed peers. The 10 Malaysian ports recorded 10% growth in highyield gateway volume in 1Q18. Westports took the lead with 26% yoy growth, outperforming PTP and Penang Port. Port Klang’s overall 1Q18 gateway volumes grew 12% yoy, implying that Northport saw a decline in gateway volumes of up to 11%.
• Good news on additional port calls. While stock sentiment was adversely affected by the realignment of port calls and alliance volumes, we highlighted in earlier reports that the schedules are subject to revisions. Westports is seeing additional port calls across its key customers. Hapag-Lloyd (part of THE Alliance) announced in May 18 its plan to expand its Asia – Gulf Westbound service by adding a direct Port Klang call. CMA CGM upgraded the Asia-East Africa (ASEA) Kenya port rotations (from Shanghai to Mombasa in East Africa) and Asia-Africa (ASAF) port rotations (from Busan to Kribi in West Africa), both of which have Port Klang calls. Evergreen recently announced the addition of more vessel frequencies for its Asia-East Africa (AEF) service which has two calls in Westports (Port Klang). CMA CGM and Evergreen are part of the Ocean Alliance. It appears that these service upgrades are linked to increased market demand and trade optimisation between China and Africa. These should be positive for Westports’ transhipment volumes from 2H18.

STOCK IMPACT

• We prefer to wait and see given the uncertainties of global trade wars. Despite the increased port calls, the uncertainties of global trade wars are hampering near-term catalysts. According to the Baltic and International Maritime Council (BIMCO), tariffs on US$50b worth of Chinese exports to the US will affect the container shipping industry on the eastbound transpacific trade lane. This is estimated to affect about 0.7m TEUs of Chinese seaborne containerised goods. The direct impact to Westports may be small nevertheless, as the Asia-America trade lane comprises about 8-9% of Westports’ total volumes.
• 2Q18 results at around end-Jul 18. The upcoming results will be an important indicator of Westports’ recovery. 2Q18 profits may decline yoy as the lower base of transhipment volume was in full effect from May 17. We expect management to guide on port calls, and clarity on monthly transhipment volumes if they revert to yoy growth from May 18 onwards.

EARNINGS REVISION/RISK

• Retain 2018-20 earnings forecast, which also assume a 15% tariff hike by 2H18.
• Risks: a) uncertainty of trade wars; b) fuel costs may impact Westports’ earnings; and c) shipping customers’ margins being affected by rising fuel cost. This may pressure ports for rebates.

VALUATION/RECOMMENDATION

• Maintain DCF-target price of RM3.35. At an implied 19x 2019F P/E, 13x EV/EBITDA and 3.6% dividend yield, our target price is based on a DCF valuation up until 2054.
• Maintain HOLD. Although there is upside risk to valuations and forecasts, we prefer a wait-and-see approach until the 2Q18 results announcement to gain more certainty on earnings catalysts towards the 2H18 horizon. We have not priced in the long-term CT10- 19 potential yet, and advise looking towards 2H18 or when Westports updates on its profit guidance. We also bear in mind that risk-reward is still neutral, as concerns on local economic growth and global trade wars may overshadow port calls’ outlook. Entry price: RM3.10.

Source: UOB Kay Hian Research - 9 Jul 2018