THE Ministry of Transport granted a tariff hike for Port Klang two weeks ago and this will certainly be an income growth catalyst for Westports Holdings Bhd.

But investors appear to have shrugged off the positive news, partly due to the broad bearish sentiment on the local bourse. The lukewarm response is also because analysts do not foresee an immediate strong boost to the port operator’s earnings.

However, Westports CEO Ruben Emir Gnanalingam is upbeat about the tariff hike. “We expect to see immediate impact in the fourth quarter, especially with regard to gateway containers. Next year will have a full-year effect. Transshipment containers will take a longer time to show any real impact,” he tells digitaledge Weekly.

The ministry has approved a 30% hike, to be implemented in two stages. The first 15% increase will take effect on Sept 1 while the second 15% hike will kick in on Sept 1, 2018.

The revised tariff covers container terminal handling charges for import, export, transshipment, shifting and restow, storage charges for containers and handling charges for heavy lift or uncontainerised cargo, says Westports (fundamental: 1.45; valuation: 0.30) in a filing with Bursa Malaysia on Aug 13.

The last revision of the key container tariff items at Port Klang was 14 years ago.

“Earnings-wise, the immediate effect will be slightly mild because for transshipments, we expect it to take about five years to pass on the increment. So, for the next five years, Westports will see a 3% hike each year,” says Hong Leong Investment Bank (HLIB) Research analyst Abdul Hadi Manaf.

Transshipment is the bigger contributor to the group, at 70% of total throughput, while gateway contributes about 30%.

Beyond that, analysts point out that a catalyst for Westports is the potential third terminal in Port Klang that the ministry has been reviewing for some time now.

While there is no clear plan in place yet, the proposed terminal is expected to be able to handle up to 30 million twenty-foot equivalent units (TEUs) a year.

For its present operations, Westports is utilising some 80% of its 11 million-TEU capacity.

It is expecting to complete Container Terminal 8 (CT8) in 2017, which will bring its total capacity to 13.5 million TEUs. There is no timeline yet for CT9, which will bring  capacity to its maximum 16 million TEUs.

Analysts are fairly confident that there is sufficient demand to fill the oncoming capacity expansion.

“The commencement of CT8 will bring utilisation down to 70%. But assuming gross domestic product growth of 5%, Westports will hit an 80% utilisation in 2019, thus calling for more capacity expansion,” says TA Securities analyst Tan Kam Meng.

As Westports is expected to complete CT9 by 2021, capital expenditure (capex) requirements should also taper off by then.

But Westports’ chieftain holds a cautious view of capacity expansion. “If you believe that the world economies will still be in a tough environment, then added capacity [in 2017] may be more difficult to fill,” he says.

While Westports saw a weak response to its shares following news of the tariff hike, some quarters maintain that it is still worth the money for long-term investment.

“In the long term, Westports is still a ‘buy’, given current prices. I look at Westports as an undervalued stock,” says Danny Wong, CEO of fund management firm Areca Capital Sdn Bhd. “It is a steady growth company, but it will take a while to demonstrate that growth.”

He adds that over time, Westports’ price-earnings ratio (PER) should drop as earnings continue to expand. The port operator’s 12-month trailing PER is 26 times currently.

The last few quarters have shown some slowdown in net profit, but Wong believes that this should stabilise by year-end.

Westports saw slight earnings growth in the first half ended June 30, 2015 (1HFY2015), with net profit up 4.7% year on year to RM242.3 million and revenue up 4.1% to RM804 million. However, profit margins fell 5.4 percentage points to 30% that half-year from 2HFY2014.

“For the past few quarters, costs have been eating into its margins slightly, but the company is working to improve its efficiencies in this area. I also expect the business to grow faster than its costs and hopefully, costs will stabilise this year,” says Wong.

Moving forward, a large portion of growth will hinge on the performance of intra-Asia trade, not to mention the formation of the Ocean 3 alliance earlier this year.

The route-sharing alliance formed between French container shipping group

CMA-CGM — Westports’ largest customer — China Shipping Container Lines Co Ltd and United Arab Shipping Co has opened up potentially larger market shares for the port operator.

Intra-Asia trade growth, which makes up 49% of Westports’ throughput, has moderated to 8% in 1HFY2015F from 13% in 1HFY2014.

“I expect intra-Asia trade growth to remain in the high single digits. Coming from a high base, we probably won’t see high percentage increases for a while, but in about three years’ time, I expect to see it scale higher than now,” says HLIB Research’s Abdul Hadi.

HLIB Research has a “buy” call on Westports and a RM5.35 target price, on the higher side of the analyst universe. This indicates an upside potential of 32%, based on last Thursday’s closing price of RM4.05.

Analysts agree that Westports is a strong defensive play, given its steady 75% dividend payout policy, which Ruben says will be maintained in the foreseeable future.

But TA’s Tan believes that this number will rise as capex needs decline.

“By 2021, it could increase its dividend payout to 90% and then again, to 95% in 2031 and 100% in 2041,” he says. This is expected to last for the duration of Westports’ Port Klang concession period, which ends in 2054.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in digitaledgeWeekly, on August 17 - 23, 2015.