Investment Highlights

• We downgrade our recommendation on Westports from BUY to HOLD as its share price has reached slightly above our unchanged fair value of RM4.52/share. Our FV reflects an unchanged FY24F P/E of 18x, at parity to its 5-year average with 3% premium from a 4-star ESG rating. We believe that foreign funds have been buying Westports, reflected in the increase in foreign shareholding from 26.8% in Dec 2023 to 27.6% in June 2024.

• According to management, Westports’ yard utilisation rate reached 100% in June 2024 as the port continued to experience congestion. The prolonged Red Sea crisis has caused shipping delays and schedule disruptions. According to GoComet analytics, median ship delays in Westports eased slightly to 2 days in the first week of July from 3 days in mid-June 2024.

• We believe that the congestion would have limited earnings impact on Westports. In fact, it may increase value-added services (storage fees & reefers) revenue as ships spend more time at the port. This could help offset the decline in volume due to the congestion. Additionally, we believe that there may be a shift to pricier break bulk cargo from container for ingots shipping due to the limited supply of containers. Hence, we made no changes to our earnings.

• More ships have diverted to Port Klang due to the severe congestion at the Port of Singapore. According to Linerlytica, ship berthing delays in Singapore range between 4 and 5 days currently. Southeast Asia makes up 23% of the global idle containers waiting to dock, followed by Middle East (20%) and India (11%).

• Westports has adopted a few strategic approaches to manage port congestion. The company does not simply accept ad-hoc vessel calls without a clear plan for timely collection. Also, it has streamlined gate openings and prioritised heavy-load vessels. This is pertinent to avoid further port congestion and disruptions for existing vessels at the port.

• We expect port congestions to ease in 2H2024 as economic activities take a breather during the summer season in Europe.

• Shanghai Containerised Freight Index soared to a new post- pandemic high of 3,733.8 USD/TEU on 5 July 2024. However, the index is still below the pandemic high of 5,110 USD/TEU on 7 Jan 2022.

• A re-rating catalyst would be tariff hikes. In 2023, management proposed for a revision in container tariffs so that Westports can compete better with the other regional ports. Westports’ existing local box tariffs are 50% lower than those in Jakarta, Philippines, and Thailand.

• Recall that Westports proposed a 50% tariff hike a decade ago but was granted only a 30% tariff increase from Ministry of Transport (MOT). This was implemented over 2 stages - a 15% increase in 2015 and another 15% in 2019. We estimate that a 10% increase in tariff charges could raise Westports’ FY25F earnings by 25%.

• Key downside risks are:
  
  i) global trade headwinds from longer Red Sea transit disruptions.
  
  ii) high operational cost due to unfavourable forex rates and elevated Brent crude oil price environment, and
  
  iii) longer shipping delays and a lower-than-expected increase in tariffs.

• The stock is currently trading at a fairly-priced FY25F PE of 19x, +0.5 SD above its 5-year average of 17.8x, while offering a decent dividend yield of 4.6%.

Source: AmInvest Research - 12 Jul 2024