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

Solid Margin Profile: The company is built upon strong fundamentals. The company has consistently maintained and EBIDTA margin above 45%, Operating Margin above 40% and Net margin above 20% since June 2017 quarter. Further, the group maintained a solid RoE and RoIC profile at the same time.

Source: Refinitiv (Thomson Reuters), Kalkine Group, RoE and RoIC numbers are not annualized

3QFY20 results outperformed the industry median: During 3QFY20, the group has outperformed the industry median significantly on various parameters. The group recorded an EBITDA margin of ~60% against the industry median of ~33%, operating margin of ~52% (Industry Median ~17%), a net margin of ~36% (Industry Median ~5%) and an RoE of 4.5% (Industry Median ~4.5%).

Source: Refinitiv (Thomson Reuters), Kalkine Group, RoE numbers are not annualized

An Income Play: At the last closing price, the stock was offering a dividend yield of 4.14%, which is decent, given the lower interest rate environment. Also, the company has a proven track record of dividend payment over the past 10-Years. Further, a high yielding stock with a track record of consistent dividend payment regardless of economic cycles tends to remain in the limelight, especially for income-seeking investors.

Dividend History (Over the past 10-years). Source; Refinitiv (Thomson Reuters)

Solid Spread Between ROCE and WACC: WTE’s ROCE stood at 12.9%, and the Weighted Average Cost of Capital (WACC) stood at 5.7%, implies a spread of 7.2%. This shows the financial prudence of the company. The higher spread between ROCE and WACC shows higher free cash flow generation ability of the company, which provides a greater margin of safety to investors.

Stock Hovering above the Crucial Short-term and Long-term Support Levels: At the last closing price of CAD 15.46 (on November 13, 2020), shares of WTE traded above the crucial short-term as well as long-term support levels of 50-day, 100-day and 200-day SMAs. Also, the moving averages are moving higher, which is another bullish trend. Also, during the November 13, 2020 trading session, WTE shares crossed over its long-term resistance of 200-day SMA and managed to close above the long-term resistance level, which implies that the stock has entered into a long-term bullish zone.

Technical Price Chart (as on November 13, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

Strong Return on Equity: The company’s TTM return on equity stood at 18.9%, which is gigantically higher. Further, a higher ROE suggests that a company’s management team is more efficient when it comes to utilizing investment financing to grow their business. ROE is more than a measure of profit: It's also a measure of efficiency. It also indicates how well a company's management deploys shareholders’ capital.

Risk Associated with Investment: The cash inflows of the Corporation are entirely dependent on Westshore’s operating results. They are 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 costs. The variance in revenues from in 2020 from 2019 will ultimately be impacted by numerous factors, including total volumes shipped through the Terminal, the distribution of throughput by customer and foreign exchange rates. Further, the company is exposed to credit risks which include risk of financial loss to the Corporation if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Credit risk arises primarily from accounts receivable and cash and cash equivalents. Credit risk can also arise on foreign currency contracts held by the Corporation.

Financial Highlights: Q3FY20

Source: Refinitiv (Thomson Reuters)

• During the three months ended to September 30, 2020, the group’s revenue declined approximately 15% to CAD 89.5 million, mainly because of lower tonnage shipped in the Q3FY20 at 6.8 million as compared to 8.3 million tonnes shipped in the same period of the corresponding financial year.
• Of the tonnes shipped in Q3 2020, 72% was metallurgical coal and 28% was thermal coal, compared to 57% and 43% respectively for the same period in the prior year.
• In Q3FY20, Operating expenses declined by 8.9% to CAD 39.4 million for Q3 2020 compared to CAD 43.2 million for the same period in 2019 primarily as a result of reduced volumes. Also, Operating cost reductions continue to be a key focus of the terminal operations.
• Administration expenses of CAD 3.7 million in Q3 2020 increased from the CAD 3.6 million incurred in the same period of 2019.
• Profit in the quarter decreased to CAD 32.3 million in 2020 from CAD 40.7 million in 2019, as a result of the lower revenues from lower volumes.
• After-tax other comprehensive loss for the third quarter decreased to CAD 1.8 million in 2020 from CAD 5.4 million in 2019. The change in the third quarter of both 2020 and 2019 was caused by a 0.25% decrease in the discount rate which increased the post-retirement obligations. This was partially offset by plan assets performing better than actuarial expectations.
• Operating cash flows before changes in working capital, lease obligation interest payments and income tax payments for the third quarter decreased by 18% to CAD 53.4 million in 2020 from CAD 64.8 million for the same period in 2019.

Year-to-Date Performance

• Tonnage shipped in 2020 year to date was 22.2 million tonnes compared to 22.8 million tonnes in 2019. Of the tonnes shipped in 2020, 66% was metallurgical coal and 34% was thermal coal, compared to 65% and 35% respectively for 2019.
• Year to date coal loading revenue decreased by 7.0% to CAD 266.8 million in 2020 from CAD 286.8 million in 2019.
• Volumes were down 2.8% year over year and the average loading rate for 2020 to the end of Q3 was CAD 12.03 per tonne compared to CAD 12.57 per tonne for 2019, in line with budget.
• Year to date, other revenue totaled to CAD 11.9 million, consisted of CAD 5.6 million of customer shortfall payments with the remainder primarily being wharfage income. Other revenue for the same period in 2019 was CAD 5.6 million and consisted primarily of wharfage income.
• Year to date, profit decreased to CAD 96.0 million in 2020 from CAD 102.9 million in 2019, primarily as a result of the lower revenues.
• Operating cash flows before changes in working capital, lease obligation interest payments and income tax payments decreased by 4% to CAD 161.3 million in 2020 from CAD 167.4 million in 2019.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 64.70% of the total shareholding. JIM Pattison Group, Inc. and Burgundy Asset Management Ltd. holds the maximum interests in the company at 35.08% and 10.43%, respectively. The institutional ownership in the WTE stood at 33.37%, and ownership of the strategic entities stood at 39.92%.

Source: Refinitiv (Thomson Reuters)

Stock Performance

In a year over period, shares of WTE plummeted ~32% due to lower tonnage shipped.  The stock is featuring a negative price return of 18.5% on a YTD basis. However, price recovery is witnessed in the stock over the past three months, after lockdown restrictions lifted gradually and improving shipment activity. In the last three months, its shares increased by 1.64%, while surged 16% and 9% in the last one month and five trading sessions, respectively. Also, WTE shares have outperformed the benchmark index over the past one month and 5-day trading sessions. 

1-Year Price Chart (as on November 13, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

In a Year-over period, WTE shares registered a 52W high of CAD 22.77 (on November 18, 2019), and a 52W low of CAD 11.88 (on March 23, 2020). And, at the last closing price of CAD 15.46 (on November 13, 2020), its shares traded approximately 32% lower against its 52W High and traded approximately 30% above from its 52W low.

Valuation Methodology (Illustrative): Price to Cash Flow based Valuation Metrics

*Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: The company reported modest performance in the third quarter of FY20, and the performance was affected by the volume and mix of coal shipped through the Terminal. However, the company is built upon strong fundamentals, with a consistent track record of EBIDTA margin above 40% over past ten-years, operating margin above 35% at the same time and Net margin above 20% since 2011. Further, the company has consistently reported ROE above 15% since 2012, which reflects prudent capital allocation ability to the company to generate higher returns to the shareholders.

Also, amid lower interest rate around the world in the wake of heightened uncertainties over world economy due to COVID-19 pandemic, the company is offering a lucrative dividend yield of 4.14%, which is approximately 1.18x of the S&P/TSX Composite Dividend Yield of 3.5% and 5.4x of the Canada 10-Year Government Bond Yield of 0.77% with a track record of consistent dividend payment over the past 10-years.

More importantly, its shares have registered a crossover on the daily price during November 13 trading session, with price crossover its crucial long-term resistance of 200-day SMAs, a crossover typically considered to be a bullish price trend in an underlying security.

Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 15.46 on November 13, 2020, with a lower double-digit upside potential.

*Recommendation is valid at November 16, 2020 price as well.

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Disclaimer

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