A Member of Pat McKeough’s Inner Circle recently asked for his advice on a shipping terminal company that focuses on one facility and one commodity.

Pat likes the 3.9% yield and the high barrier to competition, but notes the company’s revenue and earnings have been dropping and are becoming ever more concentrated in politically unpopular thermal coal.

Q: Pat, I’m interested in getting your opinion on Westshore Terminals, trading on the TSX. Is the new deal with Teck a plus? Thank you.

Westshore Terminals Investment Corp. (Toronto symbol WTE; www.westshore.com), operates a coal storage and loading terminal on land leased from the Vancouver Port Authority at Roberts Bank, B.C.

Westshore ships both metallurgical and thermal coal. Teck Resources is its largest customer, accounting for over 60% of sales.

The company’s revenue has shown steady but slow growth over the past five years from 2015 to 2019. It rose 8.1%, from $365.8 million in 2015 to $395.4 million in 2019.

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During that time, earnings fell 8.9%, from $152.9 million in 2015 to $139.4 million in 2019. The main reason for the decline was steadily rising costs. However, per-share earnings rose 1.5%, to $2.09 from $2.06, on fewer shares outstanding as the company continued to buy back shares.

Due to lower shipments of coal due to COVID-19, Westshore’s revenue in the three months ended September 30, 2020, fell 14.7%, to $89.45 million from $104.92 million a year earlier. Earnings also fell 20.6%, to $32.3 million from $40.7 million. Per-share earnings dropped 18.0%, to $0.50 from $0.61, on fewer shares outstanding.

Westshore is debt-free and holds cash of $172.4 million, or $2.68 a share.

The company’s shares yield a high 4.0%, and its dividend appears safe.

Inner Circle: Thermal coal isn’t an ideal asset for the future

Westshore’s facilities are a key asset given prospective competitors face high barriers to entry, including major permitting challenges. Canada also has limited West Coast port capacity.

However, the company’s business centres on a single facility and commodity. That adds considerable risk. Major operational difficulties or an unexpected shutdown or strike at one of its coal customers—especially Teck—could force it to cut or halt its dividend payments.

Meanwhile, the company has just signed a new contract with Teck. But while that new deal lets it keep the coal giant as its biggest customer, it also means that thermal coal customers represent over 64% of its volumes effective April 1, 2021. That’s nearly double the 37% they represented in September. The increase adds to Westshore’s risk—the market for metallurgical coal for steelmaking has a positive outlook, but thermal coal, which is used to generate electricity in power stations, is falling out of political/social favour.

Concern about coal’s environmental impact continues to limit use of this once-important energy source. Environmental opposition seems likely to grow and lead to higher taxes and regulatory costs. Westshore is a case where a high yield and modest P/E (the ratio of the stock’s price to its per-share earnings) signal danger, rather than a bargain.

Recommendation in Pat’s Inner Circle: Westshore Terminals Investment Corp. is not recommended.