Aiming to be listed on 18 October 2013, Westports Holdings Bhd (WHB) is the operator of Westports in Port Klang, which is situated in the Straits of Malacca within the global main shipping line. WHB has grown their market share of container traffic in Port Klang to 69% since 1996 and is well-positioned to grow further in the long-term with plans to potentially bump up their capacity from 9.5m TEUs annually to 16m TEUs annually in the next 10 years, representing a 68% increase in capacity. With the higher than average operational efficiency which also results in superior margins coupled with a favourable shift in the container industry, we believe that WHB offers a long-term investment proposition. At a target price of RM2.90 based on DDM, we believe that investors should accumulate this stock as it gives a decent dividend yield (FY14: 3.5%) with sustainable long-term growth.

WHB – operator of Westports, Port Klang. Westports, operated by WHB is situated in Port Klang, which is in close proximity to the main shipping route along the Straits of Malacca. The port mainly handles container and conventional cargo with other port services: marine services, rental services and other ancillary services. Since 1996, they have grown their market share of container traffic in Port Klang to 69%, cannibalising its neighbour next door, Northport’s share of Port Klang’s traffic over the years (make sure this statement is factually right). Currently, Westports have 6 container terminals capable of handling 9.5m TEUs annually with plans to potentially ramp up the capacity up to 16m TEUs per annum. On top of that, Westports’ terminals have 15.0-17.0m of berth depth with capability to handle large vessels that are able to handle 18,000 TEUs per annum.

Favourable shift in industry dynamics. We see a shift in global container trade to the Far East region and the South East Asian container trade is also expected to grow above the global growth rate as the ASEAN Economic Community (AEC) goes on line in 2015. We believe that the change in the container industry is favourable to WHB with higher container volume growth expected in Port Klang and Malaysian ports as a whole. Another trend we identify in the industry is the shift of shipping liners’ preferences for larger container ships to achieve higher economies of scale to improve their profitability. Westports have sufficient berth depth and top-notch port infrastructure to handle larger vessels due to their continuous investments in their port infrastructure. This will make more shipping liners preferring WHB as transhipment or import/export hub over its peers moving forward.

Port operator with better than average efficiency. Operationally, Westports is one of the most efficiently run ports in the container port handling industry with higher crane and berth productivity than Northport and Port of Singapore (PSA, one of the key competitors of Westports in this industry). On top of that, WHB has a higher terminal utilisation rate than Northport, which is situated close to Westports in Port Klang. This shows that the management is managing its operations efficiently, which has led to higher profitability. In 2012, WHB achieved the highest net profit margin among its peers (average CY12 net profit margin was 21.2%) after excluding non-core revenue like construction revenue and management fee.

Long term value with sustainable growth. Using a 2-stage dividend discount model based on (i) first stage growth rate of dividends per share of 10% from FY15 to FY22, (ii) terminal growth rate of 1.0%, (iii) cost of equity of 7.3%, and (iv) beta of 0.6, which is the average adjusted beta of NCB and BIPORT, its peers listed on Bursa Malaysia, we derived a target price of RM2.90/share, indicating a potential upside of 16.1% from the IPO price of RM2.50/share. At the IPO price, FY14 dividend yield is expected to be at 3.6% based on an assumption of 75% payout ratio, which is reasonable given that it is still a growing company with more capacity expansions plans moving forward. We believe that investors should accumulate this stock due to its (i) decent dividend yield, (ii) sustainable growth on the back of capacity expansions, and (iii) top class efficiency with superior cost management.

Source: Kenanga