- We maintain our HOLD call on Westports Holdings, with a DCF-derived fair value of RM2.66/share (WACC: 6.1%; terminal rate after Year 2024: 1%). This implies a forward PE of 20x on FY14F earnings.

- The media cited Westports CEO Ruben Emir Gnanalingam as saying that it intends to increase container tariffs due to higher cost, but has yet to submit an application to the Port Klang Authority (PKA).

- The last hike was in 2003, and it has yet to adjust its cost structure to absorb the fuel hikes in 2005/2006. Gnanalingam declined to specify when Westports planned to submit its application to the PKA. Westports had wanted to apply for a tariff hike last year but was “told to apply after the general election,” as “it was a sensitive issue.”

- Any tariff increase would no doubt be a positive for the port operator. Westports’ transhipment rates are currently ~30% lower than those of the Port of Tanjung Pelepas and just about half of the rates at the Port of Singapore (Refer to Table 2 on Page 2).

- Westports’ effective terminal handling revenue per TEU was ~RM103 and ~RM197 for transhipment and import/export, respectively, for FY12. We have assumed the amounts at RM106 and RM197, respectively, for FY14F.

- Assuming a between 5% and 15% increase in tariffs, we expect earnings to rise by 9%-35% for FY14F-FY16F. Broadly, a percentage rise in tariff will result in a two percentage point increase in earnings. Our DCF-derived fair value will increase by about the same percentage as the tariff hike (Refer to Table 3 for the sensitivity analysis).

- Currently, the stock is capped by the uncertainty over the potential impact of the P3 alliance members rerouting their Asia-Europe/Mediterranean port calls by 2H14. Any tariff hike would help to mitigate the impact of the P3 rerouting.

- We are projecting container throughput to rise by a slower 5% in FY14F partly due to the P3 impact and capacity constraints, and by 6% in FY15F as the new CT7 comes on-stream. The estimate for FY13F is an at least 7.5% growth vs. 15% and 8% in FY11 and FY12, respectively. We maintain our numbers for now, pending more updates on the proposed tariff hike. 

Source: AmeSecurities