KUCHING: Westports Holdings Bhd (Westports) is not likely to lose its biggest customer overnight, said the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), following news that CMA CGM will move its shipping traffic from Malaysia to a new terminal in Singapore.
According to a French daily quoting a member of CMA CGM’s senior management, CMA CGM is said to “move its shipping traffic from Malaysia to a new terminal in Singapore” following Temasek Holdings’ acceptance of CMA CGM’s offer to acquire Neptune Orient Lines (NOL).
“In the run up to the statement, CMA CGM and the Port of Singapore Authority (PSA) was reported to have established a 49:51 joint venture which will lease and operate four container berths in Singapore with annual capacity of three million twenty-foot equivalent unit (TEU).
“Meanwhile as part of the integration process of newly acquired NOL into the enlarged CMA CGM entity, realignment of route services will almost certainly take place to streamline its services to avoid route overlapping or duplication as a means to cut cost,” MIDF Research said.
MIDF Research inferred from the senior executive’s statement that CMA CGM could be considering moving services between Westports and PSA under its service realignment exercise to make full use of its newly established joint venture (JV), hence referring to “moving its shipping traffic from Malaysia to a new terminal”.
“For example, the enlarged CMA CGM could run services where NOL have been strong such as Asia-Mediterranean in PSA whilst shifting services where CMA CGM has had an advantage such as Asia-Europe to Westports,” the research arm said.
MIDF Research believed that it is unlikely that CMA CGM will move its entire volume currently channelled to Westports (three million TEU in financial year 2015 (FY15)).
MIDF Research noted that this is because the newly establish JV berths’ capacity is limited to only three million TEU which is insufficient given CMA CGM-NOL’s combined volume of more than seven million TEU while it also makes more sense for CMA CGM to focus certain routes at PSA and others at Westports to ensure minimal service disruption to its clients and avoid port congestion,
In additon, the research arm noted that Westports’s tariffs remain significantly cheaper at a 50 per cent discount compared to PSA and CMA CGM would likely follow through on its earlier indication of its intention to employ a dual-hubbing strategy at both Westports and PSA.
“On the contrary, we not only believe that the probability of Westports losing all of its container volume as remote but also maintain our view that Westports could see healthy growth in throughput volume following the formation of the Ocean Alliance which controls 23.5 per cent of global container market share.
“Meanwhile, Westports could also gain access to new customers within the alliance, namely COSCON, Evergreen and OOCL which currently do not considered Westports as their main hub,” the research arm said.
Overall, MIDF Research maintained its ‘buy’ call on Westports with a target price of RM5.00 per share based on discounted cash flow (DCF) valuation (terminal growth: two per cent, weighted average cost of capital (WACC): seven per cent).
MIDF Research liked Westports due to clear path for higher container handling tariff with the next hike scheduled in 2018 which will help to cushion any weakness in the gateway segment, reduction in effective tax rate due to the ITA extension granted for FY16-FY17 and scheduled completion of CT8 with additional 2.5 million TEU capacity in FY17 coinciding with the formation of the Ocean Alliance.