Westports Holdings, 13 Aug 2015

Westports Holdings

We maintain BUY on Westports, with a tweaked DCF- derived fair value of RM4.79/share (vs. RM4.87/share previously), representing 27x FY16F PE (vs. a high of 29x in recent months).

Following a recent site visit to the port in Pulau Indah, we cut our FY15F container throughput growth assumption to 8% from 10% previously. Pursuant to its container tariff hike, we now assume a lower increase in the implied terminal handling revenue/TEU for transhipment and gateway for FY16F at +2% and +8%, respectively (vs. 8% and ~11% earlier). All in, these lead to a cut in our earnings projections by 3%, 10% and 11% for FY15F, FY16F, and FY17F, respectively.

Management reiterated a 5%-10% growth in container throughput for FY15F. For July, Asia-Europe, which constitutes a quarter of total throughput, still registered a double-digit growth rate (1Q: +30%, 2Q: +14%), while Intra-Asia (~50% of total throughput) at a single digit growth rate was also better than 2Q’s (1Q: 17%, 2Q: +1%). For 1H15, it registered an overall 10% rise in throughput (1Q: +17%, 2Q: +3%). Notwithstanding 2H traditionally being better than 1H in the ratio of about 55:45, we have taken a more conservative stance amid the current economic environment.

Management also reiterated that transshipment container tariffs are subject to long-term contracts with shippers, while net rates (post rebates) for transshipment are now already on par with those of Port of Tanjung Pelepas. The positive impact will be felt more significantly for gateway traffic. Westports has also submitted its appeal for a five-year investment tax allowance, which could smooth out tax rates at 18%-20% annually. We maintain the corporate tax rate at 24%. A reduction to 18% would see an 8% rise in earnings for FY16F and FY17F, and bring down valuation to 26x PE for FY16F.

Meanwhile, Phase 1 of CT8 is on schedule and is expected to be completed by early next year, while phase 2 is expected to be completed by mid-2017. Reiterate BUY for:- (1) the full-year impact of the recent tariff hike, which will be realised in FY16F; (2) CT8 will increase its throughput capacity by 11% by early next year to 12.2mil TEUs and by another 11% to 13.5mil by mid-2017; (3) stable dividend payout, with 75% dividend policy and yield of ~3%; and (4) potential of lower taxes.

 

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