Westports Holdings Bhd
(Jan 22, RM3.57)
Downgrade to hold with a target price (TP) of RM3.40: We downgrade Westports Holdings to a “hold”, with an unchanged discounted cash flow-derived fair value of RM3.40 per share. This implies a forward price-earnings ratio (PER) of 22 times on financial year 2015 forecast (FY15F) earnings. 

The stock has risen to a high of RM3.66 per share (on Jan 14, 2015) — a 25% increase from RM2.93 on Nov 6, 2014 when we upgraded it to a “buy”. At the current price, the stock is trading at 23 times our FY15F earnings estimate — in line with the average PER of select regional port operators. 

This is a level at which we believe it is entering into optimism for a government go-ahead to a tariff hike proposal for its gateway (import or export) container traffic. 

Our FY15F earnings forecast at RM526.2 million, which has yet to incorporate the potential tariff hike, is not far off the consensus estimate of RM529.8 million.  

At its 75% dividend policy and our earnings estimate for FY15F, our projection is for an 11.7 sen per share payout that translates into a yield of about 3.3% — in line with consensus estimates. 

As management has said, a tariff hike is not a done deal. Without the tariff hike, we believe the current price has priced in its potential organic growth in container traffic. 

Long-term growth will continue to be constrained by terminal handling capacity, notwithstanding the start-work on new container terminal CT8 by early this year, which will raise capacity to 13.8 million twenty-foot equivalent units (TEUs) by mid-2107 from 11 million TEUs now. 

Our current assumption is for capacity to rise to 13.5 million TEUs by FY17F and to 16 million TEUs (with new container terminal CT9 coming onstream) by 2020. We estimate capacity utilisation at 80% to 87% for FY15F and FY16F, and at 74% for FY17F.  Beyond that and with the inclusion of CT9, we expect utilisation at 70% to 82%. 

Our earnings estimates have also factored in an incentivised effective tax rate of 18% for the next five years from FY15F to FY19F. The lower effective tax rate is to account for a five-year investment tax allowance. The current tax allowance cycle ended at the end of last year. 

“Hold” for a 3.3% dividend yield and the potential tariff hike. — AmResearch Sdn Bhd, Jan 22

This article first appeared in The Edge Financial Daily, on January 23, 2015.