Westports Holdings Bhd
(Dec 8, RM3.36)
Maintain “buy” with a higher target price of RM3.96 from RM3.44. We see Westports as a beneficiary of low crude oil prices (Brent).

With price weakness, we expect the company to see further direct savings in fuel costs.

Additionally, such an environment should help boost economies in the US and other major oil importing countries, a net positive for a world struggling with slowing growth. This will likely sustain Malaysia’s exports growth in the period ahead and solidify transshipment activities going forward.

Coupled with the impact of the Ocean Three alliance, this bodes well for Westports.

As a consequence to our revision, this effectively translates to a 3.2% increase in financial year 2014 (FY14) earnings and an average increase of 5.9% on our FY15-FY24 net profit.

We have assumed no improvement in fuel burn on its cranes, thus further providing room for earnings upside.

We see the likely possibility of higher throughput diversion coming from Port of Tanjung Pelepas’ (PTP) non-Maersk customers.

This could be beneficial to Westports in the event that these customers, which were previously calling at PTP, decide to call at Westports instead of NCB’s Northport. This could be likely, noting Westport’s high 20-foot equivalent unit handling productivity and more advanced port infrastructure following the completion of its container terminal 7 recently.

The earnings upgrade raises our discounted cash flow (DCF)-derived target price to RM3.96 (from RM3.44) premised on 6.1% weighted average cost of capital (from 6.6%) as we lower our beta to 0.7 times from 0.9 times owing to the low correlation to the market given its defensive cash flow stream.

At an implied FY15 Enterprise Value/Earnings Before Interest, Tax, Depreciation and Amortisation (EV/Ebitda) and price earnings ratio of 15.5 times and 24.8 times respectively, Westport’s valuation appears rich.

But, when pitting it against other ports with high Ebitda margins, it leads in the rankings on high return on equity, dividend yields, low net gearing and decent double-digit Ebitda compound annual growth rate of 11% in FY13-FY16.

As such, we deem that its implied multiples are justifiable. The stock gives decent projected dividend yields of 3.5%-4%. — RHB Research, Dec 8

This article first appeared in The Edge Financial Daily, on December 9, 2014.