Via Westports, investors can participate in South-East
Asia’s accelerating trading activities. With core net profit
potentially expanding at a CAGR of 4.6% over FY12-15F, the
port operator is deemed as a cash cow that will deliver an
average annual FCF of MYR484m over FY14F-18F. We initiate
coverage on the stock with a BUY. Our DCF-based FV of MYR2.84 is
premised on a 7.12% WACC.
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A leader in Port Klang. Wesports offers investors a
unique opportunity to participate in the heightening trade activities
in South-East Asia (SEA).The port’s strategic location allows the
company to capitalize on strong trade growth in SEA. Drewry
Research expects container throughput in SEA to grow 6.0% annually over
FY12-15 vs global troughput’s 5.5%.
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The P3 alliance. The P3 alliance is a collaboration
between three of the biggest container liner companies, of whom
one is CMA CGM, Westports’ biggest customer. The alliance may
be a key risk for Westports as transhipment boxes could be
diverted to PTP, the alliance’s transhipment hub. We understand
that CMA CGM has committed an annual capacity of 600k
twenty-foot equivalent units (TEUs) to the P3 alliance. We are of the
view that out of this, 400k TEUs will be diverted annually from
Westports and the remaining 200k TEUs from other transshipment hubs. We
estimate tha t volume loss from this alliance may make up 2-5% of total
volume.
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Core net profit growth of 4.6% over FY12-15F. We
forecast FY13F/14F/15F core earnings at MYR456m/474m/478m
respectively, buoyed by higher container throughput – which
would result in economies of scale - and margin expansion. This will
imply a 4.6% core net profit CAGR over FY12-15F. The potential revision
of the upper band in container tariffs would be a key catalyst to
earnings.
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Initiate coverage with a BUY. Our DCF-based
FV for Westports of MYR2.84 is premised at a 7.12% WACC. As the
company is capable of generating an average annual FCF of MYR484m
for FY13F-15F, it is able to commit to a 75% dividend payout
policy, which translates to yields of 4.1% for FY14F-15F. Our FV of
MYR2.84 implies a FY14 P/E of 23x and EV/EBITDA of 14.2x. Westports
has the highest dividend yield of 4.1% among Malaysian port operators.
Executive Summary
Leading port operator at Port Klang. Westports, one of the leading port
operators along the Straits of Malacca, offers investors a unique
opportunity to participate in the growing pace of trade activities
in SEA. It is one of the two port operators at Port Klang besides
Northport, a Bursa Malaysia-listed port operator under the entity
NCB Holdings (NCB MK, NEUTRAL, FV: MYR3.50). Port Klang is one of the
world’s 15 busiest ports by container throughput, serving as a
key transhipment hub in the Straits of Malacca and as a main
gateway for import/export cargo for Peninsular Malaysia.
Westports’ throughput growth outpaces growth at Port Klang.
Port Klang has registered strong container throughput growth,
registering a 8.3% CAGR from 2002 to 2012, in line with the 8.3% global
growth projected by Drewry in the same period. Port Klang’s growth was
primarily driven by transhipment cargo, which saw a 10.0% CAGR from
2002 to 2012 versus 5.8% for import/export cargo. Over the
same period, Westports managed to grow its container volume at a faster
rate of 13.2%, thanks to growth from key customers and high operating
efficiency. Overall, its share of container throughput at Port Klang
rose from 39% in 2001 to 69% in 2012. Strategic location to benefit
from higher trade activities. Westports is well positioned along
the main trade lane in the Straits of Malacca and is exposed to the
Asia-Europe and intra-Asia trade lanes. The port’s strategic location
allows Westports to capture the strong trade growth in
South-East Asia (SEA). Drewry expects container throughput in SEA to
grow 6.0% annually over FY12-FY15 versus 5.5% for global throughput.
Efficient cost management. Westports believes it
has one of the highest port productivity in the world,
consistently achieving 35 moves per hour (mph) for vessels longer than
300 metres. According to Drewry, Westports achieved 169,271
moves per crane per year in 2011, ahead of other big names in the same
trade lane such as PSA and PTP. Westports’ EBITDA margins are also among
the highest in the region. Far East and SEA markets to propel
container growth. The rise of the emerging economies and the trend in
outsourcing production lines have led to improved global trade flows
across all transport modes. The increasing demand for the
containerisation of manufacturing products and goods has also expanded
across a wider spectrum due to its convenience and cost effectiveness in
terms of time and costs. The rising importance of Asia’s economies as
global manufacturers of a wide range of products and merchandise –
thanks to their cheaper cost of production – has made the Far East
a leader in container throughput, accounting for approximately
39% of the global container trade share, according to Drewry. Of this
share, China alone accounts for 67% of the traffic from the Far East,
or equivalent to 26% of the total global trade in 2011. SEA, meanwhile,
accounts for 14% of global container trade – a level that this
region has managed to maintain since the early 90s. Drewry projects
that global container throughput would grow by 5.5% annually from 2012
to 2015, mostly driven by the Far East and SEA markets.
These two regions will contribute to the bulk of the TEU
throughput when compared to other regions, due to their stronger
economic growth prospects.
Straits of Malacca the world’s busiest trade lane. As
the Straits of Malacca region - which comprises neighbouring SEA
countries ie Thailand, Indonesia, Singapore and Malaysia - is at a key
crossroad for container liners, it is a favourite port of call for
transhipment activities. It is also one of the busiest
waterways in the world, as an estimated 30% of global goods
and 80% of Japan’s oil needs pass through the channel,
according to the US Energy Information Administration (EIA).
With some 50,000 vessels plying this route annually, it serves
as the main line for the Transpacific and Europe-Far East routes,
as well as the Intra-Asia and Intra SouthEast Asia routes. According
to Drewry, container volume in the straits area has grown at a
CAGR of 11% since 1990, outpacing the global CAGR of 9.5%.
Westports’ growing momentum. Since Westports
commenced operations in 1996, container throughput (both gateway
and transhipments) has been chalking up a CAGR of more than 11%
according to Drewry. The throughput growth was boosted by aggressive
efforts to ramp up capacity to meet its target for high
transhipment volume, which currently accounts for 72% of the
port’s total volume. Westports’ efficient throughput handling, which
ranks fairly high in terms of crane productivity, has made the terminal a
preferred port of call for transhipment cargo in the Straits of
Malacca. Its ability to generate high transhipment volume has
also allowed it to garner a bigger market share of Port
Klang’s total throughput at 69% (Northport: 31%). As Port Klang is a
national load gateway for indigenous trade, this gives liners more
incentive to make Westports the preferred port of call. Its efficient
throughput handling capability and highly accommodative modern port
infrastructure allows it to support vessels with capacities of up to
18,000 TEUs.
Westports offers the more flexibility to liners. Although
Northport is viewed as Westports' closest competitor, the latter
has an acclaimed crane productivity track record in container
handling, according to Drewry. However, Westports does not
directly compete for volume with Northport. Instead, its
immediate competitors are PTP and PSA. While the latter two are close
to Westports' efficiency (measured by crane productivity), only the
latter can offer customers the benefit of efficient handling capability
coupled with its lower pricing per TEU. Furthermore, as
Westports is situated in Port Klang, this also gives liners an
incentive to call at the port, given its higher number of container
exchanges per call - from its direct services in addition
to transhipment boxes. However, as both PTP and PSA are
expanding their terminal capacities moving forward, we cannot ignore
the fact that the race to grow market share will get more competitive.
P3 alliance is a key risk. The P3 alliance
is a collaborative agreement between three of the biggest
container liner companies: Maersk, Mediterranean Shipping Company
(MSC) and CMA CGM. CMA CGM is Westports biggest
customer, accounting for 36% of the latter’s total container throughput
handled in FY12. The P3 alliance, which is expected to begin in
June 2014, could pose as a key risk for Westports, as
transhipment boxes could be diverted to PTP, the
alliance’s transhipment hub. We understand from management that
CMA CGM contributed about 2.5m TEUs to Westports in 2012, of
which 1m TEUs could potentially be exposed to the P3 routes.
The P3 service routing announced by CMA CGM, if implemented,
will result in a revision of port calls - Port Klang’s weekly service
calls will be reduced to six from 10 out of the 26 proposed
for the AsiaEurope/Mediterranean trade lanes. We have factored
this impact into our earnings model, where we expect the number of
boxes diverted from Westports to PTP to be as much as 200k TEUs
worth in FY14F and 400k TEUs annually from FY15F onwards. As
CMA CGM has committed to an annual total capacity of 600k TEUs to P3,
we think our assumption of 400k TEUs being diverted away from Westports
is fair. The remaining 200k TEUs will be lost by other ports. Other
risks include: i) high customer concentration; ii) a lack of cost
flexibility as the majority of port workers are directly hired; iii)
a slowing global economy, which may affect Port Klang’s
throughput, especially for Asia-Europe routes; and iv) intense
competition from PSA and PTP.
Solid throughput growth. We conservatively
expect Westports to achieve a container throughput CAGR of 4.8%
for FY12-15F. This is lower than Drewry’s projection of 6.0% for
SEA for FY12-15F and its historical 8.6% CAGR for FY08-12. We believe
Westports will see slower volume growth in FY14F due to the
loss of TEUs diverted to PTP upon the commencement of the
upcoming P3 alliance, if approved by regulators. We also forecast
that revenue from container value-added services to grow at a 12.1% CAGR
over FY12-15F as Westports attempts to beef up ancillary income. We
expect bulk throughput to grow at a 6.0% CAGR over FY12-15F.Core net
profit CAGR of 4.6% over FY12-15F. We are forecasting FY13F/14F/15F core
net earnings at MYR456m/474m/478m respectively, buoyed by higher
container throughput (which leads to economies of scale) and margin
expansion. This implies a 4.6% core net profit CAGR for FY12-15F.
A revision in the upper band of the container tariff would be a
major catalyst to lift earnings. Note that container tariffs have not
been revised over the past three decades.
Initiate coverage with a BUY. We value Westports with a
DCF approach to derive a FV of MYR2.84, premised at a 7.12%
WACC (see valuation table overleaf). The company is committed to a
75% dividend payout policy, which translates to dividend yields of
4.1% for FY14-15F. Our FV of MYR2.84 implies a FY14 P/E of 22.7x and
EV/EBITDA of 14.2x, which is at a premium to its peer average of
14.5x and 8.9x respectively. This is justifiable given its status as
the only listed transhipment port in Asean. Additonally, Westports
has a high EBITDA margin of 53% and has the highest dividend
yield of 4.1% among Malaysia’s listed port operators.
Investment Merits
Leading port operator at Port Klang with a 69% market share Westports,
one of the leading port operators along the Straits of
Malacca, offers investors a unique opportunity to participate in the
growing pace of trade activities in SEA. It is one of the two
port operators at Port Klang besides Northport, also a
Bursa-listed port operator. According to Drewry, Port Klang as a whole
is among the world’s 15 busiest ports by container throughput, serving
as a key transhipment hub in the Straits of Malacca and as a
main gateway for import/export cargo for Peninsular Malaysia.
Westports’ throughput growth outpaces growth at Port Klang.
According to historical data compiled by Drewry, Port Klang has
been experiencing strong container throughput growth, registering a
8.3% CAGR in 2002-2012. This is in line with the 8.3% global growth
projected by Drewry for the same period. Port Klang’s growth was
primarily driven by transhipment cargo, which saw a 10.0% CAGR from 2002
to 2012 versus 5.8% for import/export cargo. Over the same period,
Westports managed to grow its container volume at a faster rate
of 13.2%, thanks to growth from key customers and its high
operating efficiency. Overall, its share of container throughput at Port
Klang rose from 39% in 2001 to 69% in 2012.
