With the weakness in Brent oil price, we expect Westports to see further direct  savings  in  fuel  costs.  Maintain  BUY  with  our  DCF-derived MYR3.96  TP  raised  (20%  upside,  and  from  MYR3.44)  –  premised  at  a WACC of 6.1% – as a consequence to our lower oil price revision. This effectively  translates  to  3.2%  increase  in  FY14  earnings  and  a  5.9% average increase on our FY15-24 net profit.   
 
Beneficiary  of  a  low  oil  price  environment.  We  see  Westports  as  a beneficiary of low crude oil prices (Brent) – recently revised to  USD90-100/barrel  (bbl)  from  USD100-110/bbl  by  our  oil  &  gas  team  for  2015 onwards. With  price  weakness  (currently  at  USD69/bbl),  we  expect  the company to see further direct savings in fuel costs. Additionally, such an environment should help boost economies in the US and other major oil importing  countries,  a  net  positive  for  a  world  struggling  with  slowing growth.  This  will  likely  sustain  Malaysia’s exports  growth  in  the  period ahead  and  solidify  transshipment activities  going  forward.  Coupled  with the impact of the Ocean Three alliance, this bodes well for Westports.

Forecasts  raised.  As  a  consequence  to  our  revision,  this  effectively translates to a 3.2% increase in FY14 earnings and an average increase of 5.9% on our FY15-24 net profit. We have assumed no improvement in fuel burn on its cranes, thus, further providing room for earnings upside. 

What  MMC  (MMC  MK,  NR)  has  plans  for  NCB  (NCB  MK,  NR)?  A mystery  still,  but  we  see  the  likely  possibility  of  higher  throughput diversion  coming  from  Port  of  Tanjung  Pelepas’  (PTP)  non-Maersk (MAERSKB DC, NR) customers.   This could be beneficial to Westports in the event that these customers, which were previously calling at PTP, decide  to  call  at  Westports  instead of NCB’s Northport. This could be likely,  noting  Westport’s  high  20-foot  equivalent  unit  (TEU)  handling productivity  and  more  advanced  port  infrastructure  following  the completion of its container terminal 7 (CT7) recently.

Maintain  BUY  at  a  higher TP.  The  earnings  upgrade  raises  our  DCF-derived TP to MYR3.96 (from MYR3.44) premised on 6.1% WACC (from 6.6%) as we lower our beta to 0.7x from 0.9x owing to the low correlation to the market given its defensive cash flow stream.   At an implied FY15 EV/EBITDA  and  P/E  of  15.5x  and  24.8x  respectively,  Westport’s valuation appears rich. But, when pitting  it against other ports with high EBITDA margins, it leads in the rankings on high ROEs, dividend yields, low net gearing and decent double-digit EBITDA CAGR of 11% in FY13-16. As such, we deem that its implied multiples are justifiable. The stock gives decent projected dividend yields of 3.5-4%. 

Key Highlights

Beneficiary of a low oil price environment.  We see Westports as a beneficiary of low crude oil prices (Brent), which were recently revised lower by our oil & gas team for 2015 onwards to an average of USD90-100/bbl (from USD100-110/bbl).  Firstly,  with  the  weakness  in  Brent  oil  price  (currently  at  USD69/barrel),  we  expect further direct savings in fuel costs. Its fuel costs (at unsubsidised price, with Chevron Malaysia  as  its  supplier)  –  primarily  used  for  its  tugboats,  rubber  tired  gantries (RTGs)  and  prime movers  – incurred  as much as  MYR88m  last  year.  This  amount represents  14.4%  of  total  operating  costs  and  is  Westports  third-highest  cost component after staff and depreciation costs.  

Secondly, a lower oil price environment should help boost economies in the US and other major oil importing countries, a net positive for a world struggling with slowing growth.  Although  the  recovery  in  Japan  and  Europe  remains  uneven,  the  broad picture still points towards a sustained global economic growth in the months ahead, led by the US and UK. This will likely sustain the growth for Malaysia’s exports in the period  ahead  and  also  solidify  transshipment  activities  going  forward  (coupled  with the  impact  of  the  Ocean  Three  alliance),  which  bodes  well  for  Westports.  Our economists project exports to grow by 4.6% YoY in 2015 from the 4.5% estimated in 2014.  

Thirdly,  if  weakness  in  oil  price  persists,  carriers  could  benefit  by  increasing  their speed knots (reducing slow steaming), where they could generate more revenue on the lower fuel costs incurred. This was not the case during the earlier part of the year, where  the  additional  revenue  earned  from  increasing  their  speed  knots  was  lower than the fuel savings. At that time, bunker prices were higher by 35-40% from current prices.  This  could  bode  well  for  higher  throughputs  and  vessel  handling  activities. However,  for now,  despite  the  sharp  weakness  in  oil  prices,  carriers  are  still continuing their slow steaming activities  as overcapacity remains prevalent, coupled with  their  efforts  to  deliver  their  carbon  dioxide  (CO2)  emissions  agenda. Furthermore, most networks and schedules made by the carriers were designed on the basis of slow steaming and any measure to reduce the latter could see massive network rescheduling, which could be very disruptive.    

Forecasts upped. As a consequence to our lower oil price revision, we therefore cut fuel  expenses  by  some  19%  on  our  FY14-24  DCF  projection,  which  effectively translates to a 3.2% increase in FY14 earnings and an average increase of 5.9% on our FY15-24 net profit. We have assumed no improvement in fuel burn on its cranes. However, we see more room to improve fuel burn on the premise that average TEUs handled per vessel are expected to increase coupled with Westport’s incoming hybrid cranes  (where  fuel  savings  can  amount  to  40-70%).  It  is  worth  highlighting  that  in FY11-13, the company’s implied TEU handled per oil barrel consumed has improved by 7.5% to 32.89 TEUs from 30.59 TEUs. We believe this is due to a higher container volume handled per vessel on the back an increase in average container vessel size.  Side news development. What are the bigger plans on NCB by MMC?   There is little clarity on MMC’s plans on its recently purchased NCB stake. But news media have speculated that this could pave way for a back door listing for PTP. If this does materialise,  this  could  possibly  see  valuations  on  Westports  being  re-rated  further should the back door listing of PTP come in at higher valuations.  Note that PTP is currently embarking on an aggressive expansion plan in the next 3-5  years  to  increase  its  TEU  handling  capacity  to  12.5m  TEUs  annually  from  the current 10.5m TEUs. This could possibly require further fund raising needs. PTP has ambitious  plans  to raise  TEU  handling  capacity  to  150m TEUs  annually (see  news here). However, this may not be  the case now for PTP if the controversial Forest City project  continues,  given  that  the  reclamation  works  for  the  project  overlap  its  port concession area (see news here). We do not rule out MMC eyeing a more prominent role in NCB in increasing throughputs in Northport, which have been dwindling down following the disposal of MISC’s (MISC MK, BUY, FV: MYR8.15) liner business. This could possibly  come  in  from  higher  transshipment throughputs from its  non-Maersk customers, which could be asked to divert their calls from PTP as the port prioritises call schedules to only Maersk carriers given its strategic stake in PTP and efforts to kick-off its P2 alliance with Mediterranean Shipping Co. Note that PTP is 30%-owned by  APM  Terminals,  which  is  a  subsidiary  of  AP  Moeller,  the  holding  company  of Maersk Lines. 

Such a move could also be beneficial to Westports in the event  that these carriers, which  had  previously  called  at  PTP,  decide  to  call  at  Westports  instead of NCB’s Northport.  This could be likely, noting Westport’s high TEU handling productivity and more advanced port infrastructure following the completion of CT7 recently. 

Maintain BUY at a higher TP. The earnings upgrade increases our DCF-derived TP to MYR3.96 (from MYR3.44), premised on a WACC of 6.1% (from 6.6% earlier), as we lower our beta to 0.7x from 0.9x. This is due to the low correlation to the market given  Westports’  defensive  cash  flow  stream.  According  to  Bloomberg  data,  the stock’s beta stands at 0.4x, which can be distorted, as it was only recently listed last year.  At  an  implied  FY15  EV/EBITDA  and  P/E  of  15.5x  and  24.8x  respectively, Westports  valuation  appears  rich.  But,  when  pitting  it  against  other  ports  with  high EBITDA margins, Westports lead in the rankings on high ROEs, dividend yields and low net gearing, coupled with decent double-digit EBITDA CAGR of 11% in FY13-16. As  such,  we  deem  that  its  implied  multiples  are  justifiable.  The  stock  gives  decent projected dividend yields of 3.5-4%.  

Upside catalysts that we have yet to factor in are a tariff revision and the extension of the investment tax allowance. The tariff hike is still a fifty-fifty shot, in our view, as the Government  has  no  reason  to  rush  for  an  approval.  However,  we  believe  an extension  of  the  investment  tax  allowance  could  likely  be  approved  in  the  coming months,  which  would  be  a  boost  to  earnings  by  11%/9%/9%/1%/7%  in FY15/FY16/FY17/FY18/FY19  respectively,  although  the  net  addition  to  DCF is  only MYR0.03 to a TP of MYR3.99.

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Westports is a leading terminal in Port Klang with a 69% market share of total container throughput.

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Source: RHB