MIDF Research has maintained its buy call on Westports Holdings Bhd but with a lower target price (TP) of RM4.38 per share from RM4.82 previously as it rolls forward its valuation base year and adjusts earnings forecast downwards.
“Our TP is based on our discounted cash flow (DCF) valuation (terminal growth: 3%, weighted average cost of capital (WACC):7.5%).
“Following the adjustment to our container throughput forecast and a higher expected capex for FY20, we are lowering our earnings estimates for FY20E/FY21F by 2.5% yoy and 1% yoy respectively. We also introduce our FY22 earnings forecasts,” the research house said in a note on Feb 10.
The research house continues to favour Westports due to lower transhipment tariffs among its peers such as Port of Tanjung Pelepas and Port of Singapore even after taking into account the second phase of tariff hike in March 2019 and the extension of the Ocean Alliance to 10 years (initially five years) until 2027. This will mitigate the effects from the reshuffling of alliances seen in FY17.
Contribution from intra-Asia trade lanes may face temporary downward pressure from the coronavirus.
“Nevertheless, we opine that the risks towards the Asia-Europe trade lane is limited as only approximately 10% of intermediate goods imports come from China.”
On a longer-term horizon, it said the Westport 2 expansion plan is still expected to increase capacity by roughly 50% to approximately 28 million twenty-foot equivalent units (TEUs) per annum by 2040.
This would allow Westports to compete more effectively for transhipment volumes against Port of Singapore which has plans to raise capacity from around 40 million TEUs to 65 million TEUs by 2040.
“Risks to our call include the prolonged coronavirus outbreak and any abrupt downside revision to port tariffs,” it said.
Nevertheless, AmInvestment Bank Research has also maintained its buy rating on Westports and said its TP to earnings (PE) for Westports is at a 5% discount to its average historical PE to factor in a higher risk premium given the impact of the coronavirus outbreak on the global economy.
“We cut our FY20–21F net profit forecasts by 6% and 8%, reduce our fair value by 10% to RM4.31 (vs. RM4.81) based on 22x FY20F EPS (from 23x previously).
“Westports’ FY19 results met our forecast and consensus estimates,” the research house said in a note on Feb 10.
Westports’ FY19 core net profit grew by a stronger 22% yoy largely due to the implementation of container tariff hike with effect from March 1, 2019, coupled with improvement in efficiency as reflected in smaller fuel cost increase despite significant growth in container volume.
The research house said Westports is cautious on the outlook for container throughput in FY20 given the impact of the coronavirus outbreak on the global economy.
For now, it has abandoned its forecast of a “small single-digit growth”. As it stands now, it believes the disruptions (factory shutdown, a slowdown in consumer demand, ports backlog due to the lack of truck drivers and stevedores) by the coronavirus outbreak on the supply chain could be larger than previous epidemics.
“We, therefore, cut our assumption to 2% (from 5% previously). For FY21–22F, we assume container throughput growth rates to maintain at 5% respectively,” it added. – Feb 10, 2020
