As there is now a decent upside to our DCF-derived TP of MYR4.85(14% upside), we upgrade Westports to BUY from Neutral. We expect 2Q15 throughput growth to moderate to 8% YoY vs 17% YoY in 1Q15. While valuations appear on the high side vis-a-vis its peers, this is justifiable given Westports’ ROE, above-average dividend yield, lower net gearing and high EBITDA margin.

• An index stock. Westports was recently added into the list of stocks on the MSCI Malaysia Index. Furthermore, the latest semi-annual review of the component stocks making up the FTSE Bursa Malaysia Index Series will be announced on 4 Jun and takes effect on 22 Jun. The cut-off date for the review is 25 May. Barring a radical change in price, we expect Felda Global Ventures (FGV) (FGV MK, SELL, TP: MYR1.70) to be removed from the FBM KLCI list of stocks, and replaced by Westports. We expect this to boost Westports’ stock liquidity going forward.
• Throughput volume still encouraging. Logs on vessel calls registered through the Port Klang Authority show that vessel calls reported by Westports/Northport have grown by 5%/6% QTD (up to 31 May), bringing their YTD vessel call growth to 14%/3% respectively. We expectWestports’ throughput growth in 2Q15 to grow 8% YoY, which would bring its 1HFY15 throughput growth to 12% YoY – putting it well on track to achieve our throughput growth of 12.2% in FY15F. While logs on vessel calls may not truly reflect container throughput, we take comfort in the fact that its vessel calls still point to an uptrend.
• Tariff hike and downside risk. The decision to raise tariffs is stillpending, and earliest approval could be granted in mid-2015. Our Removing this completely from our calculations would reduce our TP to MYR4.00 (from MYR4.85).
• Upgrade to BUY (from Neutral) at an unchanged DCF-derived TP of MYR4.85. The significant earnings growth expected in FY16 – if the tariff hike does materialise - makes Westports’ valuation compellingly more attractive, especially when coupled with its attractive dividend yield of 4% in FY16 onwards. Valuations appear on the high side when comparedsuperior ROE, above-average dividend yield, low net gearing and high EBITDA margins. Our DCF-derived TP of MYR4.85 also implies a FY16F EV/EBITDA of 13.9x, which is still below the 17x EV/EBITDA average on the 3-year average port/terminal M&A transactions.

Key Highlights An index stock. Westports recently became a constituent of the MSCI Malaysia Index following the exit of UEM Sunrise (UEMS MK, NEUTRAL, TP: MYR1.26) from said index. The MSCI Malaysia Index is designed to measure the performance of the large-cap and mid-cap segments of the Malaysian market. With 42 constituents, the index covers about 85% of the Malaysian equity universe. Furthermore, the latest semi-annual review of the component stocks making up the FBM Index Series will be announced on 4 Jun and takes effect on 22 Jun. The cut-off date for the review is 25 May. Barring radical price movements, we expect FGV to be removed from the FBM KLCI list of stocks, and replaced by Westports. This could also boost Westports’ stock liquidity going forward.

Throughput volume remains encouraging. Logs on vessel calls registered through Port Klang Authority show that vessel calls reported by Westports/Northport are rising by 5%/6% QTD (up to 31 May), bringing cumulative vessel call growth to 14%/3% respectively. We expect throughput growth in 2Q15 to moderate to 8% YoY for Westports from 17% YoY in 1Q15. This would bring its 1HFY15 YoY throughput growth to 12%, and puts it well on track to achieve our throughput growth forecast of 12.2% YoY in FY15.

While logs on vessel calls may not truly reflect container throughputs, we take comfort in the fact that vessel calls are still pointing to an uptrend. For instance, in 1Q15, Westports’ vessel calls grew 20% YoY – which translated to a throughput increase of 17% YoY. We also note that CMA CGM’s vessel calls have increased by52% YTD (up to 31 May 2015) although we expect some of this to be offset by the reduced calls from AP-Moeller Maersk (Maersk) (MAERSKB DC, NR) and Mediterranean Shipping Company.

Still a net increase despite throughput diversion from 2M. Vessel call logs indicate that Westports continues to see a net increase in the number of vessel calls between the two alliances, ie Ocean Three (CMA CGM, China Shipping Container Lines (2866 HK, NR) and United Arab Shipping Company (UASC)) and 2M (Mediterranean Shipping Company and Maersk). This supports our view that the company could record a net additional throughput of 500,000 twenty-foot equivalent units (TEUs) annually from the Ocean Three alliance, after offsetting 2M’s throughput diversions to Port of Tanjung Pelepas. We expect this throughput assumption to grow further moving forward.

Margins improve on economies of scale. Westport’s EBITDA margin has continued to trend higher over the past four quarters on the back of strong throughput volume handled, which results in economies of scale. We also observe that vessel calls from its smaller customers have increase d by 11% YTD (as of 31 May), thereby bumping up its yields. We believe that this could be sustainable, as growth is evident in its container segment as well as non-containerised cargo segment, which suffered a 2.4% YoY drop in volume in FY14. We expect the company’s FY15 EBITDA margin to improve to 56% from 53% in FY14. This could rise to 60%, once the tariff hike materialises.

Supply glut continues. The prospects of the container shipping sector continue to remain challenging, and we believe that consolidation would be inevitable – thecapacity growth of 7% this year, as forecasted by Maersk and Alphaliner, is set to outpace their projected 3-5% growth in demand. More deliveries of new larger containers are expected to enter the market and to date, new orders are still being secured. Media reports have said that UASC could be in talks for a new order worth USD1.5bn of up to 15 more new ships (11,000-13,500 TEU vessels), for delivery from 2017 onwards. Maersk, in turn, announced late yesterday that it will be making new orders amounting to USD1.8bn for eleven vessels (with an option for an additional eight). One notable reason for the continued interest in newbuild vessels in the container shipping sector is the expansion of the Panama Canal – expected to be completed sometime in 2016 – where waterway traffic capacity could easily double. The Panama Canal locks currently allow the passage of vessels that can carry up to 5,000 TEUs. After the expansion, Post-Panamax vessels of up to 13,000 TEUs will be able to transit through the canal.

Source: RHB Research - 3 Jun 2015