Westshore Terminals Investment Corporation (TSX: WTE) is a Canada-based company, which owns all of the limited partnership units of Westshore Terminals Limited Partnership (Westshore), which is a limited partnership. Westshore operates a coal storage and loading terminal at Roberts Bank, British Columbia. Westshore handles coal from mines in British Columbia and Alberta, as well as from mines in the north-western United States. Its coal is delivered to the Terminal in unit trains operated by the Canadian Pacific, Canadian National (CN) and Burlington Northern Santa Fe (BNSF) railways and is then unloaded and either directly transferred onto a ship or stockpiled for future ship loading.

Investment Rationale

• A High Yielding Stock: Shares of Westshore are featuring a dividend yield of 4.35%, which is quite lucrative given the lower interest rate environment. We believe that the interest rates would continue to be lower throughout 2021, as economic recovery is coming up with the expectation, which makes it an attractive bet for regular income-seeking investors. Fundamentally strong company, a sector leader, together with a consistent track record of dividend payment over the past 20-Years is likely to remain under the investors' radar.

20-Year Dividend Payment Track Record.

• A Dominant Metallurgical Coal Handler: Many will argue that coal has no place in a carbon-constrained world, but Westshore handles almost entirely metallurgical coal bound for Asian steel mills. So far, there’s no scalable alternative to coking coal as an ingredient in steelmaking. And one might have noticed that there’s something of a commodity boom going on. Earlier this month, Westshore raised its guidance to 28 megatonnes of throughput in 2021, from 25 Mt. (Back in December, the projection was 21 Mt.).

• Industry Leading Margin Profile: Given the dominant position of the company, the group enjoys strong competitive advantages against the peers and generated a higher return for its shareholders. In the below chart, we can see how strongly the company has outperformed the industry in Q1FY21.  

• Stable Outlook: As steel demand approaches pre-COVID-19 levels, the prospects for met coal and coke improve. Coke consumption is a function of steel production. Recently, the World Steel Association forecast that steel demand is likely to grow by 5.8% in 2021 and reach 1.874 billion mt, after declining by just 0.2% in 2020, as the overall impact of the coronavirus pandemic on the sector turned out to be less than previously foreseen. The recovery has been largely led by China, which produces more than half of the world's crude steel. Therefore, the long-term story is largely unchanged, and the global met coal market would continue to rise. 

• Other Drivers: The company has also been buying back shares, which should support its stock price. And it hinted at diversification in its Q1 earnings release, saying: "Westshore is well-positioned to handle other bulk commodities in addition to coal. The group continue to attract the interest of producers of other products and evaluate the feasibility of these opportunities as they arise."

• Strong Fundamentals: The company is built upon strong fundamentals and recorded an improvement on various financial parameters over the past few quarters.                              

• Technical Indicators are showing potential upside: WTE shares are taking support near lower Bollinger Band© of CAD 17.90 after a recent fall witnessed in the counter and moving towards the middle band, which is CAD 19.24. Further, the momentum indicator, the 14-day RSI, also recovered from oversold territory and now oscillating in a neutral zone at 33.7. Moreover, despite the recent fall, the stock is still hovering above the crucial long-term support level of 200-day SMA of CAD 16.93, which implies that the stock is still hovering in a long-term bullish zone.

Daily Technical Price Chart (as on May 31, 2021). Analysis by Kalkine Group

• Risk Associated to Investment: The cash inflows of the Corporation are entirely dependent on Westshore’s operating results. They can be affected by the volume and mix of coal shipped through the Terminal, the rates charged to customers for the handling of that coal, and Westshore’s operating and administrative cost.

Financial Highlights: Q1FY21

Source: Company

• Tonnage shipped for Q1 2021 was 8.0 million tonnes compared to 7.7 million tonnes for the same period in 2020. Of the tonnes shipped in Q1 2021, 64% was metallurgical coal, and 36% was thermal coal, compared to 63% and 37%, respectively, for the same period in the prior year.
• Coal loading revenue decreased by 0.4% to CAD 89.4 million for Q1 2021 compared to CAD 89.8 million for the same period in 2020. Volumes were up 4.2% for the quarter (year over year), while the average loading rate in Q1 2021 was CAD 11.13 per tonne compared to CAD 11.65 per tonne through the same period in 2020.
• Operating and administrative expenses increased by 0.4% to CAD 48.5 million for Q1 2021 compared to CAD 48.3 million for the same period in 2020.
• Profit in the quarter increased slightly to CAD 29.6 million in Q1 2021 from CAD 29.1 million during the same period of 2020.
• Operating cash flows before changes in working capital, lease obligation interest payments and income tax payments for the first quarter increased by 3% to CAD 55.0 million in 2021 from CAD 53.3 million for the same period in 2020.
• Working capital changes in the first quarter resulted in a CAD 19.9 million outflow in 2021 compared to a CAD 15.7 million outflow for the same period in 2020, primarily due to change in accounts payable and deferred revenue which fluctuates depending on the timing of payments.
• On March 16, 2021, the Company announced an increase in its quarterly dividend from CAD 0.16/share to CAD 0.20/share, effective for the first quarter of 2021.

Top-10 Shareholders

Top-10 Shareholders together hold around 56.4% stake in the company, with JIM Pattison Group, Inc., Ltd. and Great Pacific Capital Corporation are major shareholders in the company holding approximately 38% and 4.73%, respectively.  Moreover, seven out of the top-10 shareholders have increased their stake in the company, and two remain unchanged. Institutional ownership in the company stood at 21%, whereas Strategic ownership in the company stood at 42.89%.

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: Westshore has operated throughout the COVID-19 pandemic as its operations are designated as an essential service. To date, Westshore has been able to continue its normal operations at the Terminal, and currently, there is no expectation that these conditions would change and impact the group.  Further, the variance in revenues from 2020 would ultimately be impacted by numerous factors, including total volumes shipped through the Terminal, the distribution of throughput by the customer and the US/CAD exchange rate. Based on the most recent information provided by Westshore's customers, 2021 throughput volumes are anticipated to increase to the range of 28.0 million tonnes, primarily as a result of increased tonnage from Canadian customers.

Further, the company is offering a dividend yield of 4.35%, which is quite decent given the lower interest rate environment. Further, the company is offering a strong margin of safety, with a free cash flow yield of 9.9%. Also, as steel demand approaches pre-COVID-19 levels, the prospects for met coal and coke improve. This scenario would be beneficial for Westshore.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 18.37 on May 28, 2021.

1-Year Technical Price Chart (as on May 28, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid at May 31, 2021 price as well.

Disclaimer

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