By A. Stephanie
Despite both Westports Holdings Bhd’s earnings and revenue for the quarter ended March 31, 2015 (1Q15) announced last Thursday coming within many research houses’ expectations, it was hit by a slew of downgrades this morning, largely due to its rich valuation and limited upside.
The ports giant reported core profit of RM119.8 million and operations of RM386.7 million, 21-23% of consensus’ 2015 forecast. Among the downgrades was TA Research, which made a “sell” call at a much lower target price (TP) of RM3.89, whilst Maybank KimEng and Alliance DBS downgraded the counter to “hold” with TPs of RM4.50 and RM4.25 respectively.
On its downgrade, TA said “We continue to like Westports as the container throughput has been rising steadily. In addition, the possible tariff review could serve as another re-rating catalyst if the implementation were to takes place before our assumption in year 2020.
“However, we downgrade our stock call to ‘sell’ (from ‘hold’) given its expensive valuation. Note that Westports is currently trading at a forward price-earnings ratio (PE) of 24.7x and comparing that with those world leading port operators, such as Hutchison Port, DP World and China Merchants Holdings, Westports appears overvalued,” it said.
Westports’ 1Q15 net profit grew 10% on the back of 11% surge in revenue, which was attributed to higher container throughput with transhipment and gateways volume (up by 19.6% and 10.9% respectively). This growth in container throughput was abnormally high for the quarter due to overlapping services to Ocean 3 Alliance and its members and some ad-hoc calls.
Last September, French shipping giant and the world’s third largest container transportation company CMA CGM sealed the “Ocean Three Alliance” with China’s Shipping Container Lines and Gulf-based United Arab Shipping Co, which the Journal of Commerce said would operate some of the world’s biggest container vessels on the major east-west liner trade routes.
Excluding this, 1Q15 transhipment growth was still a solid 12-13% year-on-year (y-o-y) fuelled by intra-Asean trades. Intra-Asia trade, meanwhile grew 17% y-o-y.
Going forward, Westports expects growth to moderate and maintains its conservative twenty-foot equivalent unit (TEU) growth guidance between 5% and 10%, with an additional 400,000 TEUs from the Ocean Three Alliance.
“Note that the 1Q15 profit, which increased by 10% y-o-y, could have been higher if the company was granted an investment tax allowance (ITA) as in 2014. At the pre-tax level, profit surged as much as 21% y-o-y and the profit before tax (PBT) margin gained additional 3.7 percentage points to 41.3%,” TA Research said.
Its analyst remarked, “On a sequential basis, core profit contracted by 21% y-o-y and this was also distorted by higher effective tax rate resulted from the absence of ITA. At the pre-tax level, profit actually grew 3.4% quarter-on-quarter (q-o-q) underpinned by 1% growth in port revenue.”
Another issue that could change outlook on Westports is a possible tariff hike. Westports is still waiting for the government’s decision on the container handling tariff hike at Port Klang, where Westports operates its main terminals. Westports has asked for a hike of 50%,but research houses believe a 30% increase is highly possible.
The TA report notes that the ports giant is confident over the issue given that the current rates have not been changed for the past 12 years. However, Westports remains uncertain about the timing and the quantum of hike, and TA has thus far assumed the hike would take place only in 2020 by 10% higher.
Separately, the ports operator has started expansion on its Container Terminal 8 (CT8), with the 300m wharf under phase one expected to be completed early 2016 and phase two by mid-2017, whereupon Westports’ capacity will increase to 13.5 million TEUs from 11 million TEUs currently. Westports’ estimated capex for the year is RM400 million, of which the company has already spent RM70 million in the first quarter.
Meanwhile, AllianceDBS’ “hold” call was made despite raising its TP to RM4.25 following the earnings upgrade. “We downgrade the stock to ‘hold’ because of limited upside, as the share price has risen by 29% since we initiated coverage of the stock (on March 2, 2015).” In line with management’s 5%-10% expected container growth, AllianceDBS’ 2015 projections assume an 8% increase.
Maybank KimEng has a more positive throughput growth assumption of 12% in 2015, and maintained earnings forecasts despite downgrading Westports to “hold”. It said: “The stock had a good run (up 34% year to date) and the current share price has already reflected a potential container tariff hike, with the stock trading at FY16 PE of 27x (versus peers’ 16-24x) and dividend yield of sub-3%.”
Its analyst said the unchanged TP of RM4.50 has already imputed for container tariff hikes in 2019: “We still think there is only a low possibility of a container tariff hike in the near term as manufacturers and consumers are still grappling with the recent goods and services tax (GST) and taxi fare hike which have led to rising costs of doing business.”
BIMB Research, on the other hand, upgraded its call on Westports to “hold” with a TP of RM4.24, which is lower than the counter’s price of RM4.28 as at 2pm. It noted that Westports’ biggest reduction in operational cost was fuel which was 25% lower in line with lower fuel price per litre.
“The Ocean Three Alliance has change the composition of regional trade in intra-Asia trade lanes with over 50% focused on China and India, thus we reckon a change of the composition of our regional peers is justified and derived a higher regional PE of 25x from PE of 20x, thus revised our target price upwards from RM3.40 to RM 4.24 over FY15 earnings per share with a ‘hold’ recommendation.”
As at 2pm today, Westports’ was trading on Bursa Malaysia at RM4.28, down 22 sen or 4.89% from its previous closing price of RM4.50.
Other houses including MIDF Research and AmResearch maintained their “neutral” or “hold” calls on the stock, with TPs of RM4.40 and RM4.35 respectively. AmResearch said it made its call pending the decision on the proposed tariff hike, noting that yields have been compressed to just 2.6% for FY15 forecasts.
MIDF Research maintained its “neutral” recommendation: “Westports has had a good run year-to-date with a 36% gain. We believe many of the positives such as an increase in tariff rates for containers, CT8 expansion and Ocean Three Alliance have been priced in.”
The analyst continued, “In addition, the current effective rates charged for container movements by Westports are at a 15%-20% discount to the current ceiling indicating that any increases in tariffs by the Port Klang Authority or Transport Ministry will not be reflected immediately as contracts with shipping lines will have to be gradually renegotiated at higher rates.”
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