Westports Holdings Bhd
(June 29, RM4.21)
Maintain hold with a target price of RM4.61: The Ocean 3 (O3) alliance comprising France’s CMA CGM, China Shipping Container Lines and United Arab Shipping Co, is planning to cut 20% of its Asia-North Europe (A/NE) capacity over 12 weeks from end-June to mid-September, responding to the substantial overcapacity in the trade that has driven freight rates down from more than US$1,300 per 20ft equivalent unit (TEU) in late December 2014 to just over US$200 (RM758) per TEU currently. This will affect the number of port calls at Westports, and may result in a small sequential decline in the volume of containers handled during the third quarter of 2015 (3Q15) for the A/NE trade. 

Our earnings forecasts, probability-weighted discounted cash flow (DCF) target price, and “hold” rating are unchanged because our full-year volume growth forecast of 11.6% already assumes a slowdown from the 17% growth seen during 1Q15.

The O3 alliance currently deploys four loops on the A/NE trade, — the FAL1 (average vessel size of 14,000 TEU), FAL2 (13,600 TEU), FAL3 (12,000 TEU) and FAL8 (16,000 TEU). For 12 weeks from end-June to mid-September, the O3 carriers will cancel five FAL2 sailings and seven FAL3 sailings, equivalent to about 20% of its capacity to North Europe.

The FAL1 service calls at Westports on the headhaul leg only but the rest call at Westports on both the headhaul and backhaul legs. So, the O3 service cancellations could result in 24 fewer calls at Westports during 3Q15, which is about 29% of O3’s North Europe services that call at the port. The impact on Westports’ Asia-Europe (AE) volumes is likely to be negative because the O3’s capacity cuts show that the alliance is willing to forgo unprofitable spot-priced boxes. O3 could also lose market share to other alliances that have so far not announced any service cuts. However, the exact hit to Westports’ AE volumes could be moderated by the fact that: (i) O3’s A/NE service cuts are primarily designed to remove excess capacity that could not be filled anyway, while base volumes with major customers will continue to be served; (ii) additional ports have been added to the remaining O3 A/NE services to ensure that O3 retains its service proposition to customers during the 12-week period; and (iii) the O3 has not announced cuts on any of its four services to the Mediterranean, all of which call at Westports on both the headhaul and backhaul legs.

Westports is trading close to our target price of RM4.61, which incorporates the weighted average of various tariff hike probabilities. With some uncertainty on the pace of future quarters’ volume growth, an additional share price upside could be limited. — CIMB Research, June 28

This article first appeared in The Edge Financial Daily, on June 30, 2015.