We organised a visit with a group of 17 people comprising fund managers and analysts from several asset  management companies to Westports in Klang with a presentation by its CEO Ruben Gnanalingam and a tour of its port facilities. More positive developments are seen for the company as the formation of O3 alliance, which consist of its three major clients, may benefit Westport as it gains market share from other container liners through better cost structure post-alliance. Management also shared that it is open to acquisitions of other ports at the right valuation for long-term growth but would stay prudent when making decisions. On the other hand, one of its major shareholders, Khazanah Nasional Bhd, has cashed out from its 4.74% stake in the company through off-market placement, which is deemed neutral to the fundamentals of the company. Nevertheless, recent strength in its share price has brought its valuation higher than before with FY15 PER of 20.6x. As a result, we have downgraded our call on the stock from OUTPERFORM to MARKET PERFORM with an unchanged TP of RM3.13 based on DDM valuation.

Key highlights of the visit. Last week, we organised a full-day visit to Westport, Port Klang. The CEO of the company, Ruben Emir Gnanalingam gave a presentation to the investors on WPRTS coupled with insights on the strategic directions of the company in the long-term. On the other hand, we also had the opportunity to visit the newly completed CT7 terminal which will ramp up the company’s container handling capacity to cater for future growth of its clients. Responses from the investors were mainly positive as the CEO of WPRTS has given a better understanding of the port business and WPRTS’ management culture, which sets it apart from its peers.

Major clients formed O3 alliance, but positive for WPRTS this time. In the month of September, WPRTS’ biggest client, CMA CGM has sealed an alliance named Ocean Three (O3) shipping alliance with China Shipping Container Lines (CSCL) and United Arab Shipping Co (UASC), which are also WPRTS’ major clients, after the failed attempt to form the P3 alliance with Maersk and MSC earlier. Management indicated that this is a positive development for the company as the route sharing alliance will make its clients who make Westport their regional hub more cost competitive; thereby possibly gaining more market share from players hubbed at other ports. We have decided not to tweak our throughput growth assumptions upwards based on this due to global economic headwinds expected moving forward and unknown quantum of the possible incremental throughput to be gained from the formation of O3 alliance.

Intra-Asia route main growth driver. By accounting for 49.0% of WPRTS total container throughput in 1H2014, the Intra-Asia route continued to be the main growth contributor for the group with 12.9% YoY growth achieved in 1H14. The 2nd highest throughput contributor, Asia-Europe route had also exceeded expectations with positive growth posted in 1H14 (+5.4 YoY) in contrast with a decline seen last year, signaling recovery in the European region trade. This was slightly offset by previously fast growing Asia-Africa route possibly due to Ebola outbreak in the African region with lower YoY growth achieved in the same time period.

Long-term plans contemplated, but will only be implemented prudently. According to the management, WPRTS’s cargo handling capacity could be constrained by available land area in 6 year time. Questions were raised during the meeting on its longer term plans for sustainable growth in the long run. The management indicated that it is open to look at more expansions in other locations for port operations, but it is of the opinion that an acquisition of port at the right price would be less costly for further expansion of WPRTS due to the capital intensive nature of greenfield port project. A special team could be set up for due diligence.

Source: Kenanga