WPRTS (5246) : Westports Holdings - Explosive catalysts on the horizon
Target RM4.57 (Stock Rating: ADD)
Westports’ share price may be driven up in the months ahead by three potential catalysts: the start of the Ocean Three alliance, the renewal of the Investment Tax Allowance, and government approval to raise port tariffs. Westports is our top pick in the Malaysian transport space. We initiate Westports with an Add call and a probability-weighted DCF target price of RM4.57, incorporating different scenarios of the timing and quantum of the tariff hike. We expect the core EBIT 3-year CAGR of 10% to rise to 17% if port tariffs are raised 30% on 1 January 2016.
We initiate Westports with an Add call and a probability-weighted DCF target price of RM4.57, incorporating different scenarios of the timing and quantum of the tariff hike. We expect the core EBIT 3-year CAGR of 10% to rise to 17% if port tariffs are raised 30% on 1 January 2016.
Ocean Three (O3) alliance
The landscape of container carrier alliances has changed dramatically in favour of Westports. The planned P3 alliance of Maersk, MSC and CMA CGM once threatened Westports‟ transhipment (t/s) volumes, but this threat was unexpectedly nipped in the bud by China‟s regulatory rejection. The alternative 2M alliance (Maersk and MSC) will have almost no impact on Westports, while Westports‟ top three customers of CMA CGM, CSCL and UASC have decided to form the O3 alliance, which will only solidify their commitment to Westports as a t/s hub at the expense of other hubs. Once the 2M and O3 alliances begin in early-2015, Westports may enjoy at least a net 0.5m teu step-up in t/s volumes, 8% of its expected t/s volumes in 2014, in addition to the usual organic growth.
Investment Tax Allowance
There is no more uncertainty over Westports‟ ability to secure a third 5-year ITA incentive, in our view. In the past, the government granted the ITA incentive for the first 5-year period, then renewed it once for another five years, but none has ever been granted the ITA for a third time. However, AirAsia told analysts last week that it had secured the ITA for the third time, paving the way for Westports to obtain the same. This is critical for Westports since its CT8 and CT9 expansion capex will be mostly spent in the next five years.
Potential port tariff hike
We think the likelihood of a port tariff hike is high. While Westports is doing well, its GLC sister port, Northport, is suffering from multi-year volume declines and cost escalation, and needs to raise cash for a major revamp of its aging facilities. If the Ministry of Transport approves the tariff hike, it will apply equally to both Westports and Northport, as they are both governed by the Port Klang Authority. Once the official tariffs are raised, with 1 January 2016 as a likely start date in our view, Westports will raise tariffs on gateway boxes immediately, and raise t/s tariffs gradually.
Source: CIMB Daybreak - 25 November 2014
Target RM4.57 (Stock Rating: ADD)
Westports’ share price may be driven up in the months ahead by three potential catalysts: the start of the Ocean Three alliance, the renewal of the Investment Tax Allowance, and government approval to raise port tariffs. Westports is our top pick in the Malaysian transport space. We initiate Westports with an Add call and a probability-weighted DCF target price of RM4.57, incorporating different scenarios of the timing and quantum of the tariff hike. We expect the core EBIT 3-year CAGR of 10% to rise to 17% if port tariffs are raised 30% on 1 January 2016.
We initiate Westports with an Add call and a probability-weighted DCF target price of RM4.57, incorporating different scenarios of the timing and quantum of the tariff hike. We expect the core EBIT 3-year CAGR of 10% to rise to 17% if port tariffs are raised 30% on 1 January 2016.
Ocean Three (O3) alliance
The landscape of container carrier alliances has changed dramatically in favour of Westports. The planned P3 alliance of Maersk, MSC and CMA CGM once threatened Westports‟ transhipment (t/s) volumes, but this threat was unexpectedly nipped in the bud by China‟s regulatory rejection. The alternative 2M alliance (Maersk and MSC) will have almost no impact on Westports, while Westports‟ top three customers of CMA CGM, CSCL and UASC have decided to form the O3 alliance, which will only solidify their commitment to Westports as a t/s hub at the expense of other hubs. Once the 2M and O3 alliances begin in early-2015, Westports may enjoy at least a net 0.5m teu step-up in t/s volumes, 8% of its expected t/s volumes in 2014, in addition to the usual organic growth.
Investment Tax Allowance
There is no more uncertainty over Westports‟ ability to secure a third 5-year ITA incentive, in our view. In the past, the government granted the ITA incentive for the first 5-year period, then renewed it once for another five years, but none has ever been granted the ITA for a third time. However, AirAsia told analysts last week that it had secured the ITA for the third time, paving the way for Westports to obtain the same. This is critical for Westports since its CT8 and CT9 expansion capex will be mostly spent in the next five years.
Potential port tariff hike
We think the likelihood of a port tariff hike is high. While Westports is doing well, its GLC sister port, Northport, is suffering from multi-year volume declines and cost escalation, and needs to raise cash for a major revamp of its aging facilities. If the Ministry of Transport approves the tariff hike, it will apply equally to both Westports and Northport, as they are both governed by the Port Klang Authority. Once the official tariffs are raised, with 1 January 2016 as a likely start date in our view, Westports will raise tariffs on gateway boxes immediately, and raise t/s tariffs gradually.
Source: CIMB Daybreak - 25 November 2014
