Westshore Terminals Investment Corporation (TSX: WTE) is a Canada-based company, which owns the Westshore Terminals Limited Partnership. The company operates a coal storage and loading terminal at Roberts Bank, British Columbia, and revenue is derived from rates charged for loading coal onto seagoing vessels. The company services coal from mines in British Columbia, Alberta, and the northwestern United States. The coal is delivered to the terminal in unit trains and then unloaded and transferred onto a ship. It is then shipped to multiple countries across the world, with the majority headed to Japan, Korea and China.

Investment Rationale

• Built upon Strong Fundamental:  The company is built on solid foundations and has seen improvements in a number of financial metrics in recent quarters. The graphical representation below depicts growth in cash and cash equivalents due to strong operations and cash flows. The company's debt profile is also improving consistently, putting a substantial focus on the company's health.

• Updated higher projection for 2021: Earlier, the business expects volumes for FY 2021 of around 21 million tonnes, which might fluctuate by up to 10% favorably or adversely. However, it now expects throughput volumes to be approximately 28.0 million tonnes, owing largely to higher tonnage from Canadian clients, which is a significant positive.

• Focusing on diversification: The company's revenue is now derived from fees charged for coal loading into seagoing vessels. However, the firm is also concentrating on other commodities to generate new income streams since its terminal's unique position gives strategic benefits in terms of rail access, storage capacity, and vessel handling. These advantages can be applied to the management of other bulk commodities. As possibilities arise, we expect the company to continue assessing the viability of plans to handle new commodities.

• Healthy operating matrix:  Despite the challenging year of 2020, the company maintained its momentum and had strong results in gross margin, EBITDA margin, operating margin, and net margin. The Company has boosted its FY 2021 throughput volumes to the range of 28.0 million tonnes to support future growth, and we believe the momentum would continue in the near future.

• Industry beating margins: Amidst the second wave of the Covid-19 Pandemic, the Company kept up its momentum and had strong results across the board. Furthermore, the company leapfrog the industry median margins on several fronts in Q1 2021, demonstrating the company's competitive edge within the industry. Although, the gross margin of the industry in the respected period was slightly higher V/s the company. The chart below gives a glimpse of this.

• Higher infrastructure spending to help the group: Global steel production has increased significantly, as a considerable amount of steel would be required in the future to improve global infrastructure. Steel would be required for infrastructure, housing, and transportation in developing urbanizing economies. Today, steel demand is approaching pre-COVID-19 levels, and met coal and coke prospects have improved—steel manufacturing influences coke usage. As a result of the coronavirus pandemic, the World Steel Association recently predicted that steel consumption would rise by 5.8% in 2021, reaching 1.874 billion mt, after decreasing by just 0.2% in 2020. As a result, the long-term scenario remains intact, and the global met coal market is expected to continue to increase, which would benefit the company for a golden future.
  

• An income play: The Company has a long history of paying out dividends, demonstrating its financial strength and cash flow creation. Recently, it issued a CAD 0.20 per share second-quarter dividend, payable on July 15, 2021. Furthermore, the company offers a strong dividend yield of 4.65% at the last closing price, which is highly advantageous considering the low-interest rate environment.
  

     

Source: REFINITIV, Analysis by Kalkine Group

• Uninterrupted operation amid turbulent times: Since its activities are recognized as a vital service, the firm has been operational during the COVID-19 epidemic. To date, regular operations at the terminal have continued, and there is presently no anticipation that these conditions would alter and affect Westshore. The pandemic has no significant influence on the company’s projected throughput volumes in 2020 and should have little impact on estimated volumes in FY 2021, assuming the situation does not deteriorate.
  

• Taking support at rising trendline: On the daily price chart, the stock price is taking the support of the rising trend line, which suggest a potential bounce back from the current level. Additionally, the momentum oscillator RSI (14-period) is trading at ~38 level, which has bounced back from the oversold territory, indicating a trend reversal. Furthermore, the stock is trading close to its 21-period SMA.

Daily Technical Price Chart (as on July 09, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Risks associated with investment: The Corporation's cash inflows are totally reliant on its operational outcomes. The amount and mix of coal carried through the Terminal, the prices charged to customers for processing that coal, and the Terminal's operational and administrative costs can all have an impact. Other risks include worldwide demand and rivalry in the supply of seaborne coal, customers' capacity to sustain or expand sales or transport coal to the Terminal, currency rate changes, and so on.

Financial overview of Q1 2021 (Expressed in thousands of Canadian dollars)

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.

Top-10 Shareholders

Top-10 Shareholders together hold around 55.4% stake in the company, with JIM Pattison Group, Inc., Ltd. and Great Pacific Capital Corporation are major shareholders in the company holding approximately 37.9% and 4.7%, respectively. Institutional ownership in the company stood at 20.06%, 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 primarily handles metallurgical coal for Asian steel mills. As a steelmaking component, there is presently no scalable replacement for coking coal. The firm upped its 2021 throughput forecast to 28 megatons from 25 megatons earlier this month, which is a significant gain. Because of its terminal's advantageous location in terms of rail access, storage capacity, and vessel handling, the company is also attempting to diversify its revenue sources by focusing on other commodities. Furthermore, steel is also needed in emerging urbanized economies for infrastructure, housing, and transportation. As a consequence, more infrastructure spending would be beneficial to the organization in the long run.

Given the low interest rate environment, the company's dividend yield is 4.65% is pretty good. Furthermore, the operational excellence determination allowed the company to overtake the industry median margins on several fronts in Q1 2021, demonstrating its competitive edge within the industry. Based on technical analysis, the stock has support at CAD 14.8 level.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 17.22 as on July 09, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

One-Year Technical Price Chart (as on July 09, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid at July 12, 2021 price as well.

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