Westports gets bigger slice of growing pie at Straits of Melaka

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KUCHING: Westports Holdings Bhd (Westports) has recorded solid growth in container throughput year-on-year (y-o-y) in the first quarter of 2015 (1Q15), outpacing volume growth of the key transhipment ports at the Straits of Melaka and indicating that the group is enjoying a bigger slice of the growing pie.

According to the research arm of Maybank Investment Bank Bhd (Maybank IB Research), despite uneven global economic pickups as reflected in the Purchasing Managers’ Indices, and Malaysia’s softer external trade in January to February 2015, the key transhipment ports of the Straits of Malacca reported/indicated strong throughput growths in January to February 2015.

In total, Maybank IB Research estimates that the container throughput at SEA Big 3 ports (PSA, Port Klang and Port of Tanjung Pelepas (PTP)) grew seven to eight per cent y-o-y in January to February 2015, faster than the global container throughput growth of four per cent in 2014 and shipping liners’ expectation of three to five per cent in 2015.

“We understand that container throughput growth at Westports was strong in 1Q15 at around 15 to 20 per cent y-o-y, outpacing the SEA Big 3’s combined growth of seven to eight per cent in January to February 2015,” it said.

The research arm noted that this indicates that Westports is enjoying a bigger slice of the growing pie at the Straits of Malacca.

“Both transhipment and gateway boxes (volume split is around 70:30) have contributed to Westports’ strong growth in 1Q15,” it added.

Maybank IB Research further noted that the key drivers for the transhipment segment are robust intra-Asia trade and recovering Asia-Europe trade, with Westports’ existing customers (which are COSCO, Hapag Lloyd and MTT Shipping) having introduced a total of five new services recently and commencement of some of Ocean 3’s (O3) services in mid-January 2015 which diverted some volume from the other ports in the region (which are PTP, PSA) to Westports.

Meanwhile, the research arm said that the drivers for the local/gateway boxes include higher volume from East Malaysia as Westports’ customers (which are MTT Shipping, Pacific Selatan Agency) gained volume from Hubline Bhd’s (Hubline) exit in the container shipping business.

It added that Hubline had a total annual volume of around 100,000 twenty-foot equivalent units (TEUs) per annum (volume split between Northport: Westports was 80:20).

Drivers for the local/gateway boxes also included potentially pre-goods and services tax (pre-GST) imports and higher exports of manufactured goods due to the weaker ringgit against the US dollar.

Maybank IB Research thinks the high growth in 1Q15 could taper in the rest of 2015, but growth rate could still be high single digit, given that O3 will only go into full swing in the second half of 2015 (2H15).

It added that the net impact of the two alliances (O3 and 2M) to Westports could be an increment of around 550,000 TEUs per annum (seven per cent of Westports’ total volume).

Additionally, the research arm said that O3 also aims to bring in more organic volume growth, underpinned by its feeder network; in addition to O3 members, Westports’ other existing customers (which are Mitsui OSK, COSCO, MTT Shipping) are also aggressive in growing their volumes.

As such, Maybank IB Research raised its financial year 2015 (FY15) throughput growth forecast to 12 per cent from eight per cent previously.

Consequently, this lifts the research arm’s FY15 to FY17 earnings per share (EPS) estimates by seven, five, and three per cent.

“We keep our throughput growth assumptions for FY16 to FY17 unchanged at seven per cent per annum,” it said.

Maybank IB Research noted that a complete proposal for a port tariff hike has been submitted to Port Klang Authority two weeks ago and the proposal could be on the table of the Ministry of Transport presently.

The research arm further noted that once the Ministry of Transport approves the proposal, it will be forwarded to the Attorney General’s Chambers for feedback and thereafter, resubmitted to the Ministry of Transport for final approval.

Maybank IB Research is positive of a container port tariff hike of 20 to 30 per cent at Port Klang due to a similar tariff hike of 20 per cent for conventional cargo granted in 2012 after port tariff hikes for both container and conventional cargoes were proposed by the Port Klang operators more than five years ago and the last container tariff revision was 13 years ago and port operators have seen various cost inflation since then.

While transhipment contract renewals/renegotiations take place about every three years, the research arm thinks Westports could renegotiate the charges in the near-term as shipping liners are in much better financial shape, underpinned by their economies of scale and lower bunker costs and the pricing gap between Westports and PSA has widened (potentially more than 30 per cent, while pricing between Westports and PTP could be similar) with a weaker ringgit to US dollar rate.

However, it noted that the timing of the approval is uncertain, especially in view of the recent implementation of GST and 25 per cent hike in taxi fare.

To be conservative, the research arm continues to expect a tariff hike only from 2019 onwards (after the 14th General Election, anticipated in 2018), but it now imputes a higher tariff hike of 20 per cent for gateway boxes and a new 10 per cent hike for transhipment (previous assumption: 10 per cent tariff hike for just the gateway segment from 2019 onwards).

“With a 10 per cent hike in the tariff for transhipment boxes, Westports’ net tariff will still be very attractive, compared to that of PSA, potentially more than 20 per cent lower than that of PSA, we estimate,” it said.

Consequently, Maybank IB Research left its ‘buy’ rating on the stock unchanged while its discount cash flow-derived (DCF-derived) target price is raised to RM4.50 per share (an increase of 18 per cent).

It assumes seven per cent weighted average cost of capital (WACC) and two per cent growth per annum during 2025 to 2054.