Westports’ outlook improves as China spurns P3

by **Cals** Fri 20 Jun 2014, 01:47

Business & Markets 2014

Written by RHB Research

Thursday, 19 June 2014 09:50

Westports Holdings Bhd
(June 18, RM2.73)
Maintain buy with target price of RM3.23: China’s ministry of commerce (CMC) has rejected the proposed P3 alliance on the grounds that it will “restrict competition”. P3 refers to an alliance of three of the world’s largest container carriers — Maersk Line, Mediterranean Shipping Co (MSC) and CMA CGM.

If the P3 alliance was implemented, it would have resulted in a revision in port calls, and potentially cause CMA’s throughput to be diverted to Port of Tanjung Pelepas (PTP) in Johor — CMA is Westports’ single largest customer.

Although the European Commission (EC) and the US’ Federal Marine Commission had given the green light to the proposed P3 alliance, China still spurned it.

CMC said the proposed alliance could control a combined 46.7% of the market share, which it deemed a breach of the anti-competition law. This had led to members of the proposed alliance aborting the collaboration.

We increase our financial year 2014 ending Dec 31 (FY14) and FY15 earnings forecasts by 2%-3% on the back of a projected 2% increase in container throughput.

We earlier factored in the possibility of as many as 140,000 and 200,000 twenty-foot equivalent units in FY14 and FY15 respectively being diverted to P3’s hub at PTP.

The proposed alliance has been a dampener on the longer-term outlook of Westports as P3 could potentially grow in size. The 2%-3% upward earnings revision in our throughput forecasts lift our discounted cash flow value to RM3.23 from RM2.91 per share, premised on a weighted average cost of capital of 6.7% (which was lowered from 7.1%, as we reduce our cost of equity inputs assumptions).

The implied FY15 enterprise value/earnings before interest, taxes, depreciation and amortisation and price-earnings ratio are 13.9 times and 22 times respectively.

Meanwhile, the long overdue tariff hike, if approved, could be another kicker to earnings (of at least some RM90 million annually, assuming a 10% adjustment in tariff) as the upward difference from the tariff hike may flow directly to Westports’ bottom line. The stock offers a 4% dividend yield. — RHB Research, June 18

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This article first appeared in The Edge Financial Daily, on June 19, 2014.[/size]