Last  week’s  luncheon  session  with  Westports  was  fruitful.  The  key takeaway  from  the  meeting  was  that  the  impact  of  the  proposed  P3 alliance  will  not  be  detrimental  to  earnings.  We  also  see  an  equal chance of the  P3 alliance materialising.  We value Westports with a DCF approach  to  derive  a  FV  of  MYR2.91.  Its  75%  dividend  payout  policy translates into a decent dividend yield of 4.2% for FY14-15F. BUY.

• A fruitful lunch session. We hosted a luncheon session for Westports with clients last week. Throughout the session, discussions were mostly centered  on  the  P3  alliance,  Westports’  capex  progression  and  the outlook for where container volume growth is headed moving forward. Closer  scrutiny  by  European  Commission  (EC)  as  it  reviews  two alliances.  The container trade share of P3 and G6’s combined alliances could potentially amount to 80% on the transatlantic trade, which will see a  more  comprehensive  scrutiny  by  the  EC.To  be  fair  on  competition grounds, we think it is unlikely that the EC will only approve one alliance.
• The risk for the EC of approving both alliances is that it could dominate a sizeable  market  share  and  potentially  killing  off  competition.  We  think obtaining approvals from Europe and China would be challenging since the  alliance  would  exceed  the  30%  market  share  threshold  stipulated under the EC anti-competition laws.
• Minimal impact on P3.  The  P3 service routing  will see the number of CMA’s  Asia-Europe  services  cut  to  six  services  from  10.  CMA  CGM(CMA), Westports’ major customer, indicates that the number of boxes to be  diverted  to  Port  of  Tanjung  Pelepas  (PTP)  due  to  the  P3  alliance would  be  about  100,000  twenty-foot  equivalent  units  (TEUs)  and 200,000 TEUs for FY15, or approximately 6-7% of total TEUs handled by CMA.  This is very minimal compared with  our total volume projection of 7.8m in FY14 for the port.
• BUY maintained.  We value Westports with a DCF approach to derive a MYR2.91  FV. Its 75% dividend payout policy translates  into a dividend yield of 4.2% for FY14-15F, which we think is fairly decent. Our MYR2.91 FV  implies  a  FY14  21x  P/E  and  14.2x  EV/EBITDA—a  premium  to  its peer average. This  is justifiable  as  it is  the only listed transhipment port in  Asean.  Westports  also  has  a  high  EBITDA  margin  of  52%  and  the highest dividend yield of 4.2% among Malaysia’s listed port operators.

P3 alliance approval still a 50-50 chance

Receiving approval by US’ Federal Marine Commission. The P3 alliance has just received regulatory approval from the US’ Federal Marine Commission (FMC).  This leaves pending approvals from two  more regulators—EC  and China’s regulator, and it may  possibly include Korea  as well.  To recap, the P3 alliance is an alliance of the three  largest  container  carriers  in  the  world,  Maersk  Line   (MAERSKB  DC,  NR)Mediterranean  Shipping Co (MSC)  and CMA,  which are  the first, second and third largest  respectively.  If  implemented,  the  P3  alliance  will  result  in  a  revision  in  port calls,  which  could  potentially  see  CMA’s  throughputs  diverted  to  PTP  as  we  have always  pointed  out.   CMA,  Westports’  number  one  client  with  a  15-year  working relationship, accounts for 34.6% of Westports’ total throughput contribution last year. Alliance could rake in a sizeable market share. According to the FMC, the alliance would represent roughly 42% of Asia-Europe capacity, 24% of transpacific  (Asia-US) capacity and 40-42% of the transatlantic (Europe-US) routes. This alliance will be the biggest shipping alliance. As a comparison, the G6 alliance’s market share makes up 27-28% of US import-export trade in 2013.

One of the approving commissioners voted  against it. We understand that of the five  commissioners  overseeing  the  decision  at  the  FMC,  one  of  the  five  approving members had actually opposed to the alliance, citing concerns that the alliance would dominate vessel competition and narrow shipper options at US ports. Furthermore, the  commissioner  called  the  alliance  anti-competitive,  quoting  the  alliance  as  “in name only”, and that the controlling carrier, Maersk Line, can virtually “paint the other parties’ ships light blue”.  He addressed concerns that the fellow members of  the  P3 alliance, MSC and CMA would agree to cede control to Maersk as the major decision maker. Despite being approved by the FMC, it will continue to monitor the alliance to prevent  it  from  breaching  anti-competition  laws.  This  is  in  contrast  to  the  rotating chairmanship that the G6 alliance has.

Receiving  criticism  from  various  bodies.  The  P3  alliance  had  been  widely criticised  by the Global Shippers Forum (GSF),  the trade body for the international shipping  industry  and  US  shippers'  organisation,  the  National  Industrial Transportation League (NITL)  -  on concerns that this could drive up container prices and see some smaller operators out of business.  The two biggest shipping alliancescombined will have a market share of more than 80% on the  transatlantic  trade.  We understand  that  the  GSF  has  also  requested  the  EC  to  further  scrutinise  the agreement.  Other  organisations  that  have  opposed  to  it  include  the  Korea Shipowners’  Association  (KSA)  and  China’s  Shipowners'  Association  (CSA).  Both have submitted a petition to the Fair Trade Commission (FTC).

G6 alliance expansion to compete against the P3. Following the announcement of the  P3  alliance—and  in  an  attempt  to  challenge  it,  the  second  biggest  shipping alliance, the G6 members had also announced its plan on expanding its services by deploying more liners for its transpacific and transatlantic route. The G6 members are Hapag-Lloyd (HPR GR,  NR),  Overseas Oriental Container Lines (OOCL) (316 HK, NR),  Nippon  Yusen  Kaisha  (NYK)  (9101  JP,  NR),  APL,  Hyundai  Merchant  Marine (011200 KS, NR) and Mitsui  SK  ines (M  ) (   4   P,   )  . The expansion of the G6 services, which was approved by the US FMC yesterday, has a targeted date to start these new expanded services by mid-2014. This is the same commencement timeline for the P3.

Closer scrutiny by EC as it reviews two alliances. The container trade share of P3 and  G6’s  combined  alliances  could  potentially  amount  to  8 %  on  the  transatlantic trade,  which  will  see  a  more  comprehensive  scrutiny  by  the  EC.   To  be  fair  on competition grounds, we think it is unlikely that the EC will only approve one alliance. The risk for the EC of  approving  both alliances is that it could dominate a sizeable market share and potentially killing off competition. We think obtaining approvals from Europe  and  China  would  be  challenging  since  the  alliance  will  exceed  the  30% market  share  threshold  stipulated  under  the  EC  anti-competition  laws.  Early  this week, the  EC has extended the  period of application of the so-called liner consortia block  exemption  regulation  (BER)  by  another  five  years  to  2020.  The  block exemption  only  applies  to  consortia  which  do  not  exceed  the  30%  market  share threshold, to comply with the anti-competition laws.

Minimal impact on P3 alliance

Services  to  be  trimmed  to  six  from  10;  hitting  only  200,000  TEUs  in  2015.Westports currently has 10 services out of the 30 plied by CMA on the Asia-Europe / Mediterranean trade lanes, which approximately accounts for 1m TEUs of the 2.6m handled  by  CMA  in  2013.  Following  the  implementation  of  the  P3  service  routing, Westports  will  see  the  number  of  CMA’s  Asia-Europe  /  Mediterranean  trade  lanes services cut to six from 10, out of the 26 routes being proposed by the P3 alliance for the Asia-Europe/Mediterranean trade lanes.

One cannot assume that the 40% drop in number of services (six from 10) would see a similar reduction in throughput, as the services plied will need to take into account the  loads  of  the  vessels  plying  the  routes  and  the  vessel  sizes.  Westports’management  said  that  CMA,  its  major  customer,  has  indicated  that  the  number  of boxes to be diverted to PTP  as a result of the  P3 alliance would be about 100,000 TEUs  in  FY14  (assuming  the  P3  alliance  commences  in  mid-2014)  and  200,000 TEUs in FY15 (approximately 6-7% of total TEUs handled by CMA). CMA contributed approximately 2.6m of the total 7.5m throughput handled by Westports in 2013.  As such, the impact will be  very minimal compared with  our total volume projection of 7.8m in FY14.

Expanding  its  non-P3  services.  Furthermore,  CMA  also  intends  to  offset  the diverted  cargo  by  expanding  into  non-P3  trade  lanes  such  as  the  upcoming  AsiaAfrica/Middle  East  link  as  well  as  intra-Asia.  This  firms  up  CMA’s  commitment  to maintain Westports  as its transshipment hub.  We  also  noted that of late,  CMA has been  expanding  its  feeder  services  in  the  African  region,  which  is  the  region registering  the  highest  container  trade  growth  given  the  continent’s  low containerisation  rate  -    the  term  to  define  the  proportion  of  goods  shipped  by containers. We also understand  that the  Asia-Africa/Middle East link will also involve vessel  sharing  agreements  with  Westports’  second  and  third  largest  customers; China  Shipping  Container  Lines  (CSCL)  (2866   K,    )  and  United  Arab  Shipping Company (UASC). CMA’s box contribution could be flat at best. With the expansion of CMA’s IntraAsia  and  Asia-Africa,  the  growth  coming  from  these  two  alone  would  be  able  to cushion  the  downside  impact  from  the  box  diversion  to  PTP.  For  instance,  CMA’s Africa/Middle East boxes contribution grew by almost  25%  y-o-y  last year,  coupled with  the  growth  from  Intra-Asia  (+7%)  and  Australia  (+22%),  all  these  combined witnessed an additional  increase of  100,000 TEUs,  which was  more than enough to offset  the  60,000  reduction  on  Asia-Europe  boxes  (-6%).  As  such,  we  think  any reduction  on  the  diversion  of boxes  to  PTP  could see  minimal impact  for  CMA.  At best, we foresee that throughput contribution from the said carrier could be flat. Slightly  positive  on  G6  alliance  expansion.  As  the  G6  recent  expansion  plans focuses on expanding its services on the  Transatlantic  and Trans-pacific route, the impact for Westports will  be positive on only one service, albeit minimal, which is the Port  Klang  -  Singapore  –  Laem  Chabang  –  Yantian  –  Los  Angeles  –  Oakland  –Pusan –  Shanghai (Waigaoqiao) –  Ningbo –  Yantian –  Singapore service.  Typically,transshipment hubs at the  Strait of Malacca from/to West-bound boxes are done at Singapore.

Banking on growth  in vessel deliveries for other  customers.  Westports’  second and  third  largest  customers,  CSCL  and  UASC,  are  also  looking  to  aggressively expand  their  services  in  light  of  the  recovery  in  global  trade  amidst  the  upcoming deliveries of their  18,000-19,000 TEU  vessels  over the next few years.  For instance, UASC, which is also boosting up its  marketing forces,  has pending vessel deliveries totaling 17 vessels (14,000 and 18,000 TEUs vessels) for 2014 -2016 at an average vessel  size  of  15,411  TEUs  per  vessel.  Meanwhile,  CSCL  has  11  vessels  in  the pipeline with a size of 10,000 TEU and 19,000 TEU vessels to be delivered over the same period.  By fleet expansion, both carriers mentioned trump  the fleet addition of the leading container shipper - Maersk’s 10 18,000 TEU vessels coming up within the same period too

Growth  projection  for  2014.  Management  is  targeting  growth  of  5-10%  vs  our conservative forecast of  4.6%, incorporating the assumption that the P3 alliance will commence  by  mid-2014,  which  we  foresee  is  highly  achievable.  Over  the  longer horizon  of  a  10-year  period,  we  project  a  CAGR  of  4.4%  driven  by  world  trade activities  and  increased  demand  for  containerisation  goods  and  products.  This  will also be attributed to  the growing size of its clients’ fleet.  Volume as of the first two months in 2014 remains healthy, showing positive growth, which we estimate could be in the mid-single digit range.

Taking  more  market  share.  The  collapse  of  STX  Pan  Ocean,  one  of   orthport’s customers  (Westports’  neighbouring competitor) has brought in additional volume for Westports’  customers  at the expense of  orthport’s loss,  which had resulted  in  the latter’s  drop  in  container  volume  YTD.  Note  that  STX  Pan  Ocean  had  ceased operations in 2H2013, which we expect  the full-year  throughput uplift  to be reflected in 2014.

Source: RHB