Stock Focus Westports on track for 20% profit growth

by **hlk** Mon 09 Dec 2013, 17:33

Business & Markets 2013
Written by Esther Lee of theedgemalaysia.com
Monday, 09 December 2013 16:31
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WHILE its performance on the stock market has been dull since it was listed in
October, Westports Holdings Bhd looks set to deliver 20% profit growth for the
full year ending Dec 31.
Executives close to the company say its latest results, which showed an 18.8%
increase in earnings to RM105.73 million in the third quarter and a 22% rise in
the nine-month cumulative profit to RM304.13 million or 9.97 sen a share,
indicate that the challenges faced by the shipping industry do not affect the port
operator.
Those who favour the stock say its numbers speak for themselves and that it is
too soon to label Westports a lacklustre dividend stock without much upside
potential.
After a much-publicised listing on Oct 18, Westports, which counts Hong
Kong-based tycoon Li Ka-shing as a key shareholder, has seen its stock hardly move from its RM2.50 initial public offering price. The
counter closed at RM2.53 last Thursday for a market capitalisation of RM8.56 billion.
The perception that Westports was fully valued when it was listed has cast doubts on its prospects. Particularly damaging to the stock was
the recent announcement of a mega alliance between the big boys of shipping — CMA CGM Group, Maersk Line and Mediterranean
Shipping Co — that plan to pool their vessel capacity to control a substantial portion of the East-West trade lane and stabilise freight rates.
It is worth noting that CMA CGM Group is Westports’ largest customer, having contributed about 18% to the port operator’s revenue in
FY2012.
The P3 Alliance’s new service route involves re-routing that will result in fewer vessels calling at Westports as more emphasis will be given
to its rival Port of Tanjung Pelepas (PTP) in Johor, a subsidiary of MMC Corp Bhd. The proposed new routes will see a reduction in calls
at Port Klang, where Westports operates — from 10 out of the 30 on the Asia-Europe/Mediterranean trade lines to 6 out of the proposed
26 lanes.
The alliance is still pending regulatory approvals from the US, Europe and China and it hopes to commence its new service routes by the
middle of next year. However, it has been reported that the alliance is under investigation by the European Commission and subject to
legal proceedings for price fixing.
Nonetheless, Westports is unfazed by the threat of re-routing by the P3 Alliance, say executives close to the company. They add that the
shipments of the proposed alliance make up only a small portion of total shipments per annum while the bulk of Westports’ shipments is
from South Korea, Taiwan, Japan and China.
According to Maybank Investment Bank Research, re-routing by the P3 Alliance could result in a loss of 175,000 twenty-foot equivalent
units (TEUs) for Westports or 2% of its total volume.
“CMA CGM believes that around 275,000 TEUs or 4% of Westports’ total volume will be transferred out to PTP. However, the net impact
could be a loss of only 175,000 TEUs or 2% of total volume as CMA CGM introduces new non-P3 services from 1H2014 onwards,
particularly for the growing intra-Asia, Asia-Middle East and Asia-Africa markets,” says the research house, adding that it had met CMA
CGM management recently.
Based on Drewry Maritime Advisors, PTP’s throughput volume exceeds that of Westports.
Last year, PTP recorded 7.1 million TEUs while Westports chalked up 6.3 million.
PTP’s revenue came in at RM904 million last year, which was up 3.3% from a year ago. Profit
after tax fell 9.8% to RM91.7 million from RM109.6 million due to higher depreciation charges
for capital expenditure incurred during the year.
According to MMC Corp’s 2012 annual report, PTP has embarked on a capacity expansion
programme, adding two berths to the port to increase the total to 14. In comparison,
Westports has a total of 25 berths spread over 6,642m.
Both PTP and Westports are natural deep water ports, which means larger vessels can dock
at their harbours. Industry experts highlight that it is a volume game for port operators, where
vessel capacity matters more than the number of ships at the harbour.
The channel leading to Westports is as deep as 17m and the Port Klang Authority has
announced that it will increase the depth to 18m.
According to Westports’ prospectus, the port operator has the advantage of being in the
centre of Peninsular Malaysia, a gateway to the Klang Valley where much of Malaysia’s
industry and commerce is located.
“Shipping companies would offload at a port that is most convenient to their customers. It won’t make sense for them to offload somewhere
far away and pay additional logistics cost to get the goods to their customers,” says an executive.
It is worth noting that research houses Bank of America Merrill Lynch, Maybank Investment Bank Research and RHB Research Institute
have called a “buy” on Westports with target prices ranging from RM2.70 to RM2.84.
HSBC Research, Credit Suisse Research and Goldman Sachs Research are “neutral” on the stock while Barclays Research is
“underweight” on it.
In a report, Maybank IB forecasts throughput growth at Westports to come in at 7% to 8% from FY2013 to FY2015. It also projects a 4.1%
net dividend yield in FY2014 based on a share price of RM2.55, which, the research house notes, is considerably higher than that of
stocks on the FBM KLCI.
This story first appeared in The Edge Malaysia Weekly Edition, on December 02 - December 08, 2013.