This article first appeared in The Edge Financial Daily, on November 16, 2015.

Westports Holdings Bhd
(Nov 13, RM4.32 )
Maintain buy with an unchanged target price (TP) of RM4.77: In an announcement to the Singapore Exchange, Singapore-listed Neptune Orient Lines (NOL) confirmed that it is in preliminary separate discussions with two potential suitors, namely CMA-CGM (CMA) and AP Moeller-Maersk.

NOL is Southeast Asia’s largest shipping line, handling 5.7 million twenty-foot equivalent units (TEUs) in financial year 2014 (FY14) and 3.7 million TEUs in the nine months of FY15 (9MFY15). We believe that Westports could be an indirect beneficiary should CMA’s bid is successful. Recall that CMA is Westports’ largest customer.

If CMA’s bid for acquiring NOL is successful, we could see a rising utilisation of Westports or the Asian-North America and Asia-Europe services of the enlarged CMA-NOL group. While it is difficult to quantify the exact amount of containers that will be shifted due to service adjustments, we estimate that a 20% shift in cargo from the Port of Singapore Authority (PSA) could increase Westports’ FY16 throughput volume by 430,000 TEUs or 4.4% based on the annualised 9MFY15 cargo handled for the Asia-North America and Asia-Europe routes.

Currently, NOL utilises the PSA as its main port of call in the region with limited port calls made in Port Klang (only Intra-Asia and Oceanic routes). As an added incentive, the enlarged group would also benefit from lower container handling tariffs (50% cheaper) on top of a cheaper ringgit.

We maintain our FY15 and FY16 earnings estimates pending the actual announcement of the CMA-NOL merger. Our TP remains unchanged based on a discounted cash flow valuation (Weighted average cost of capital 7%; Terminal growth rate 2%).

We are positive on Westports in view of: i) better earnings visibility with tariff hikes fixed over the medium term, ii) geographical diversification with 70% exposure to transshipment business and iii) potential award of investment tax allowances in FY16 which could reduce Westports’ tax rate substantially from 24% to 16%. — MIDF Research, Nov 13