- We maintain HOLD on Westports, with an unchanged DCFderived fair value of RM4.35/share. Our fair value implies a PE of 29x FY15F EPS.

- According to a recent news report, the Ocean 3 (O3) alliance – comprising CMA CGM, CSCL and UASC – is cutting ~12,000 TEU/week capacity in its Far East-North Europe services till early September.

- The reduction represents ~20% of the O3’s capacity and 4% of total capacity on the route. This stems from the further softening of shipping rates. As with any such capacity reduction, the shippers, we believe, will attempt to optimise capacity utilisation on their fleets.

- While the move is negative on Westports, it may not necessarily translate into the same quantum of decline in volume as slot utilisation may be increased. The exact impact on Westports’ transshipment and gateway volumes is still unclear. Management has likewise alluded to as much.

- For FY14, the O3 alliance represented ~50% of Westports’ container volume, while the Europe-Asia route accounted for 26% (1QFY15: 30%).

- We understand its application for container tariff hikes, via the Port Klang Authority, to the government remains status quo, with an approval possibly forthcoming anytime within the second half of the year. If that is the case, it may take effect from the start of next year.

- Westports’ share price is currently being sustained at a PE of 27x-28x. Apart from factoring the potential tariff hike, we believe the share price reflects the recognition given to its unique characteristics in its growth potential, professional management, strategic geographical location and efficiency compared to its regional peers, as well as potential acquisitions in the future.

- Westports’ expected performance for FY15F is well buoyed by its 1QFY15 net profit of RM120mil (+10% YoY, -21% QoQ). Container throughput in 1QFY15 rose 17% YoY to 2.26mil TEUs (transshipment +20%, gateway +11%).

- However, we do not expect the strong growth to be sustained, even before the latest O3 development. For now, we maintain our transshipment and gateway traffic growth at 10% each for FY15F. Maintain HOLD, pending greater clarity on the impact from the O3 alliance’s move to cut capacity.

Source: AmeSecurities Research - 1 Jul 2015