UOB Kay Hian starts coverage of Westports with Sell call

AmResearch is maintaining its Buy on Westports

KUALA LUMPUR: UOB Kay Hian Malaysia Research has initiated coverage of Westports Holdings with a Sell call and target price of RM3.30, which is a 16% downside. 

“While Westports promises decent long-term growth, we anticipate near-term earnings vulnerability,” it said on Monday. 

The research house said aside from shipping consolidation uncertainties, it expects more derating catalysts to impact the port operator,

UOB Kay Hian Research cited past effects of market share gains and additional O3 Alliance business may wane, on future capacity constraints (based on concession terms); weakness in gateway offsets tariff hike, and c) slower global trade outlook.

“Its past above industry growth was partly due to market share gains from Northport and PSA Singapore (PSA). It benefitted from volume aggregation from O3 Alliance, its single largest customer cluster (55% of throughput). 

“We bear in mind the CT8/CT9 capacity growth is slower on a high base (future 5-yr CAGR of 5% up to 16m TEUs long-term, vs 10% in the past). CT9 is the last expansion based on the terms of its current concession. A peakish more than 80% terminal utilisation may not help to retain the 9% container throughput CAGR,” it pointed out.

UOB Kay Hian Research said the gateway (import/exports) container volume contracted 5% in 3Q15.

It expected this trend to persist, as the weakness in the Malaysian economy may last until 1H16. It projected this high-yielding business to decline to 26% of container throughput in 2016 (2014: 29%).

“The volume contraction may offset a 5-6% annual net yield boost from the recent 15% tariff hike. We expect the net tariff hike effect to be moderate, given ongoing rebates and rates being revised progressively on contract renewals (three to four year average tenure),” it said.

The research house said container volume in the Straits of Malacca (Port Klang, Tanjung Pelepas Port (PTP) and PSA saw a more than 5% contraction in October 15. While the impact is not apparent yet in Westports (due to market share gains), O3 Alliance recognises this risk and is cutting capacities starting from the Asia-Europe route.

“Our RM3.30 target price is based on a 10% discount on DCF valuation to 2054, at implied 21x 2016F PE and 3.6% dividend yield – the discount is premised on a derating from near-term earnings vulnerability (our forecasts is 13% below street’s). 

“Beyond a weak 2016, Westports offers long-term potential which may be supported by Malaysia’s Masterplan for Ports, TPP Agreements, and further port developments in Port Klang. 

“Note that we currently do not assume inorganic growth and uncertainties from existing shipping consolidation trends. However, peer valuation suggests that Westports is expensive on PE and EV/EBITDA (despite having superior ROEs). A scenario analysis suggests a target price range between RM2.96-RM4.40,” it said.