- We maintain our HOLD call on Westports, but with a higher DCF-derived fair value of RM2.91/share vs. RM2.69/share previously (WACC: 6.2%; terminal rate after Year 2024: 1%). This implies a forward PE of 20x on FY14F earnings (vs.19x previously).

- Our higher fair value for the stock comes on the heels of news that China’s regulators have rejected the P3 Network’s proposed alliance to reroute their Asia- Europe/Mediterranean port calls.

- This came as a surprise to the P3 alliance members –Denmark’s A.P. Møller-Maersk's Maersk Line, CMA CGM of France and Swiss-based Mediterranean Shipping Co. The US and European regulators had earlier approved the proposals. It would have taken effect in 2H14.

- This is positive news for Westports. Starbiz today cited Westports CEO Ruben Emir Gnanalingam as saying that at this point, it is still expecting a 5%-10% rise in volume, but may have a more narrow range post its 2QFY14 result.

- The fear was not only about reduced throughput, but also the potential price setting power that the alliance members could have garnered.

- We are now assuming Westports’ container throughput (transhipment and import/export) to grow by between 8%-9% annually vs. 5%-7% previously for FY14FR-FY16F. As such, we have revised upwards the group’s earnings by between 5%-17% for FY14F-FY16F.

- The 1.93mil TEUs achieved in 1QFY14 now accounts for 23% (vs. 25% previously) of our full year estimate of 8.3mil TEUs (7.9mil TEUs previously).

- Westports posted a 1QFY14 core net profit of RM109mil (+17% YoY; -22% QoQ) – accounting for ~22% of our revised earnings for FY14F. The 1QFY13 profit accounted for only 20% of the full year earnings.

- Notably, operating revenue rose by 11.4%, but net operating cost rose by nearly a similar quantum at 10.8%.The YoY top line growth was due to an 11.7% rise in container throughput vs. our current full-year FY14F growth forecast of over 8% (vs. 5% previously).

- With the P3 overhang out of the way, Westports is now well positioned to take advantage of trade growth. Even prior to the Chinese regulators’ decision, Westports had insisted that growth was expected to remain robust in FY14.

- Another catalyst is the potential tariff hike, albeit the urgency of that happening has eased, given the latest development.

Source: AmeSecurities