WESTPORTS HOLDINGS BHD, which has been growing organically via its port operations in Westport, Port Klang, is prepared to look elsewhere for opportunities as the expansion of the port nears the final phase.

CEO Ruben Emir Gnanalingam says the port operator’s priority now is to complete container terminals CT8 and CT9 at Westport by 2020, which will increase Westport’s handling capacity to 16 million twenty-foot equivalent units (TEUs) from 11 million at the present time.

“Still, we have to keep our eyes open for growth opportunities from now so that when the right one comes along, we will be ready,” Ruben tells The Edge.

“We have not been very aggressive so far, but we know that in the next five to six years, we have to look at other locations. Asean is our preferred area mainly because it is close to home.”

However, any plan to venture abroad might change if Westports bags a contract to develop a third port in Port Klang, which may add an estimated annual capacity of 30 million TEUs to the latter’s current operation. The first and second ports in Port Klang are Northport (managed by Northport [M] Bhd) and Westport respectively.

“I think there is a huge possibility [to develop a third port in Port Klang] but it’s up to the port authorities. It is something they have not firmed up. I don’t think they’ve ruled us out but there is no certainty either,” observes Ruben.

The government has been studying the expansion of Port Klang’s capacity and looking for a suitable location for a third port, which could see either Westports or NCB Holdings Bhd, the parent company of Northport, winning the contract.

“The key is to find the right space to do it and plan it very carefully. We have to bear in mind that infrastructure investments are costly,” says Ruben.

Westports achieved a record operational revenue of RM1.5 billion in the financial year ended Dec 31, 2014 (FY2014), compared with RM1.35 billion in FY2013. This was due mostly to strong growth in the container segment, which saw handling volume rise 12.1% to 8.4 million TEUs. Net profit rose from RM435.3 million a year ago to RM512.2 million on the higher revenue.

According to Ruben, while intra-Asia has been faring well, trading volume in Australia has been normalising after a surge in 2014 and African growth has slowed after seeing strong growth since 2010.

Nevertheless, Westport’s container throughput experienced an unexpected y-o-y spurt of about 17% in 1Q2015, driven by the switching of alliances between shipping lines, which requires cargo from the ships of one alliance to be moved to the ships of another alliance.  

Ruben expects growth to normalise to between 5% and 10% by the end of the year.

Westports, which counts French liner CMA CGM, China Shipping Container Lines and United Arab Shipping Company among its customers, also boasts Li Ka-shing’s Hutchison Whampoa Ltd as a substantial shareholder with a 23.6% stake.

Analysts believe Westports’ growth potential could be stronger as the port operator has developed a reputation for under-promising yet over-delivering.  

Maybank IB Research analyst Lee Yen Ling notes that the solid performance, which outpaces the 7% to 8% volume growth of key transhipment ports in the Straits of Malacca, indicates that Westports is enjoying a bigger slice of the pie.

A 20% to 30% tariff hike — the industry’s much-anticipated catalyst — appears imminent as a proposal for port tariff hike has been submitted to the Port Klang Authority, which could potentially give Westports’ net profit a boost once approved.

“It has been 12 years since the last hike in 2003. Labour and raw material costs have increased substantially so it makes sense for a tariff hike,” says Ruben.

However, he acknowledges that preferential rates for high volume clients will still apply as the industry remains a competitive one, especially for transhipments.

“It is not easy to impose a tariff hike on transhipments but we need it to grow and to allow freight rates to be competitive.

“Our importers and exporters are benefitting tremendously because of our lower rates compared with most other ports in the region,” Ruben says, adding that there is a need for Port Klang to evolve into a stronger transhipment hub to grow its margins and sustain its regional competitiveness.

Kenanga Research, in an April 6 note, maintains its neutral stance on the sector due to a lack of catalysts and port valuations that have peaked on uncertainty over the timeline of the tariff hike. “We don’t think the upward revision of the tariff ceiling will translate into a linear positive increment in revenue for port operators because some of them may be charging their core clients rates that are lower than the ceiling.”

Nevertheless, Westports’ shares had risen 66% to RM4.14 last Thursday from RM2.50 a year ago. Interest in the stock had begun to grow last November. It was listed in October 2013 at an initial public offering price of RM2.50.

Ruben remarks that Westports has been attracting the attention of retirement funds, in particular, and foreign interest since its IPO. However, the port operator’s dividend yield has fallen to about 3% as a result of the rise in its shares, which could be unattractive to new investors looking for good dividend-yield stocks. By comparison, real estate investment trusts (REITs) offer dividend yields of about 5% to 7% or even higher.

Nevertheless, RHB Research analyst Ahmad Maghfur Usman, who projects a dividend yield of 4.1% for Westports in December 2016, opines that there is room for capital appreciation in the company.

“Westports has room for both yield and capital appreciation and it cannot be compared with REITs — which provide high yields without the capital appreciation,” he says, adding that Westports’ current share price would be in line with its fundamentals should the tariff hike materialise.

“We think a premium at EV/Ebitda of 13.8 times is justifiable, given Westports’ superior return on equity, above average dividend yields and lower net gearing (versus its peers) and high Ebitda margins.”

The research house has a target price of RM4.62 on the company.

Westports distributes 75% of its profits as dividends and intends to maintain this policy during the construction period of CT8 and CT9, which are due for completion in 2017 and 2020 respectively.

“We will be more comfortable to provide higher dividends once the terminals are completed as we don’t want our debt to reach a very high level,” comments Ruben.

At its close of RM4.14 last Thursday, Westports had a market capitalisation of RM14.05 billion.

This article first appeared in The Edge Malaysia Weekly, on April 20 - 26, 2015.

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