Fitch upgrades DP World outlook from stable to positive

International ratings agency Fitch Fitch has upgraded UAE-based port operator DP World’s outlook to positive from stable and affirmed its long-term issuer default rating (IDR) at 'BBB-'.

The positive outlook is supported by improving cash flow margins in first half of 2015, strong liquidity and expected deleveraging from 2016 onwards, assuming continued bolt-on acquisitions.

“We expect funds from operations (FFO) adjusted net leverage to peak at 3.9x in 2015 (2014: 2.4x) as it completes the acquisitions for EZ World (EZW), and Fairview Container Terminal that in our view further improve DP World's business profile. Fitch also expects DP World to remain cash flow negative until 2016, reflecting higher expansion capex,” it said.

Fitch expects the UAE operations to outperform the other operations, supported by the acquisition of EZW, which includes the 100per cent DP World-owned key asset of Jafz (BBB-/Stable). The acquisition, which improves pro forma gross leverage, should increase EBITDA by nearly $400m per annum.

Fitch expects the acquisition of Jafz to be positive for DP World's operating efficiency at the port of Jebel Ali in Dubai, as Jafz's assets are located immediately adjacent to the port's existing footprint. DP World's ownership of Jafz will enable it to improve the layout of the port access and enable it to expand its logistic capacity and access to support ongoing growth of the port of Jebel Ali and improve integration of the port area with the new Al Maktoum International Airport.

Combining Jebel Ali Port and EZW Free Zone allows DP World to integrate its logistics operations, underpinning port volumes. Currently 70per cent of DP World's cargo is origin and destination (O&D). DP World focuses on O&D cargo, rather than transhipment cargo, as it provides higher margins and is less affected by competition and global economic performance than transhipment hubs (such as Singapore).

Growth capex increase

DP World has commenced construction for container terminal four, which will increase capacity by 3.1m TEUs by 2018 at Jebel Ali, to meet demand following UAE's record delivery of throughput volumes of 15.2m TEUs in 2014.

The port continues to operate at high levels of utilisation and, given the strong domestic and regional growth outlook including the lead up to Expo 2020, DP World is delivering capacity now to meet the future demand of the UAE and the wider region (for example the lifting of sanctions on Iran). DP World's gross capacity utilisation marginally improved to 79per cent at end-2014 (2013: 78per cent).

DP World is one of the four largest container port operators globally based on volume. Its global market share remained at 9per cent at end-December 2014. The company's throughput volume is anchored by its operation of Jebel Ali port in Dubai, giving it a dominant market share in the Middle East.

Challenging macro conditions may limit volume growth at DP World's individual ports. However, additional capacity at Jebel Ali (Dubai), Yarimca (Turkey), Rotterdam (Netherlands) and Nhava Sheva (India) should support consolidated volume growth and margin increase, offsetting Fitch’s expectations of weaker trade activity.

Fitch considers DP World as geographically well-diversified relative to its peers. Volume volatility resulting from irregular economic growth in developing markets is currently offset by stronger pricing across much of its portfolio.

DP World plans to invest $5.3bn capex in 2015-2018.

Fitch expects full year capex for 2015 to be $1.6bn, and $1.3bn for 2016 for maintenance (around 12per cent of total capex) and port level expansion (this does not include additional port acquisitions). DP World has some flexibility to defer investments, particularly where capex relates to a terminal's super-structure such as cranes.

Should DP World face a reduction in throughput volume at certain locations, Fitch would expect a curtailment in growth capex. Maintenance capex is typically around $150m per year (3per cent of total property, plant and equipment). Despite the high levels of capex, Fitch expects DP World to remain free cash flow (FCF) positive from 2016 onwards, helped by its low dividend payments.

Cash and cash equivalents amounting to $2.4bn as of end-June 2015, and undrawn committed borrowing facilities of $2.5bn more than satisfactorily covered short-term debt of $86.9m.

Combined with strong operating cash flows forecast for 2015 and 2016, Fitch expects there will be more than adequate funding for capex over the next two years.

The group's credit facility is currently well within the covenant limits. Foreign exchange risk is mitigated by the geographical spread of revenues, and the dollarisation of tariffs.

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