Westports Holdings Bhd
(Aug 3, RM4.29)
Upgrade Westports to buy from hold: This is based on a higher discounted cash flow-derived fair value of RM4.87 per share (vs RM4.35 per share previously), and on management’s expectations of a container tariff hike that could be announced in the next few months.

Our fair value implies a fair price-to-earning of 22 times our upward revised forecast for financial year 2016 (FY16) earnings per share. At a conference call last Friday, management said they had obtained indications the authorities were amenable to the hikes. The hikes could be at 10%-30%.

As such, we have incorporated a 15% tariff hike in gateway container traffic, leading to a 12% and 13% increase in earnings for FY16’s forecast (FY16F) and FY17F.

Even though the regulatory rates for transshipment containers would also rise, we are leaving their tariffs unchanged for the time being. Transshipment containers are subject to long-term contracts with shippers, and the impact is still unclear.

This means there is further upside to our fair value. Furthermore, management has appealed for another five-year round of investment tax allowance that would lower its tax expenses. We have yet to factor this into our model.

Meanwhile, Westports’ first half financial year 2015 (1HFY15) net profit of RM242 million (+4.6% year-on-year) met expectations — accounting for 47% and 46% of our and consensus forecasts, respectively. It declared a dividend per share of 5.32 sen, representing a 75% payout, and translating into a yield of 1.3%.

We deem the results to be in line, though downside risks in 2HFY15 have heightened due to a global economic slowdown that would have a negative impact on trade.

Nonetheless, management expects third-quarter (3Q) results to be better than in 2Q on the back of anticipated improved numbers on the Asia-China and Asia-Africa trade lanes, and sustained growth in the Asia-America lane.

Total container throughput in 2QFY15 grew only 3% y-o-y to 2.16 million twenty foot equivalent units (TEU) (transshipment +3%; gateway 5%) after a robust growth of 17% in 1Q.

The growth mainly stemmed from market share gained from the transition to the Ocean Three Alliance, which has made Westport a regional hub.

For 1HFY15F, total container volume was up 10% y-o-y (transshipment 11%; gateway 8%) at 4.4 million TEUs, accounting for 48% of our estimate. Transshipment accounted for 71% of total throughput.

We maintain our transshipment and gateway container traffic growth at 10% each for FY15F. Westports is maintaining the total container growth at 5%-10%. — AmResearch Sdn Bhd, Aug 3

This article first appeared in digitaledge Daily, on August 4, 2015.