DP World, among the world's four largest container terminal operators by capacity and throughput, is poised for further growth in the coming years as a result of huge expansion in its terminals across the world.
The company is working on a number of expansion projects across the existing portfolio that will add 11.4 million TEU (twenty-foot equivalent units) by 2010. It also has 13 new terminal projects, which are expected to add 25.3 million TEU of gross capacity by 2017.
DP World operates 45 terminals in 25 countries, including the Jebel Ali Port in its home market of Dubai, as well as facilities in India, Australia, China, the United Kingdom and Argentina.
The company was catapulted into the world league of port operators through the merger of Dubai Ports Authority (DPA) and DPI Terminals in 2005 and the $1.2 billion (Dh4.4bn) acquisition of CSX World Terminals in 2005 and the transforming $6.9bn acquisition of P&O in 2006.
In a recent report on the company, rating agency Moody's Investor Service said DP World is today a well diversified port container operator, which has established itself among the world's largest port operators.
"The company's strategic priority lies in cementing this position, which was acquired following the company's acquisition of P&O in 2006, in order to capture the benefits from rapidly growing markets and responding to capacity constraints in the global container port industry," said the report.
It says the growth will be achieved through a combination of organic expansion and corporate acquisitions, though the latter is expected to be small scale. DP World will focus on developing new projects that are expected to add 25 million TEU of gross capacity by 2017, of which 7.8 million TEU will be operational by 2010.
"The company's growth will also be pursued by expanding its current facilities in order to improve productivity and efficiency of existing assets. This expansion plan is expected to add 13 million TEU, of which 11.4 million will be operational by 2010.
DP World's ratings incorporate the increase in leverage that will result from this ambitious expansion.
Given the scale of the group's investment programme, Moody's expect the company to maintain a disciplined approach to new developments, while remaining flexible to defer and change capital allocations, depending on market developments.
According to Moody's, the group plans to strengthen its operational efficiency, as well as sales and customer service efforts to be the port of choice for its customers. This includes providing customers with tailored solutions and value-added ancillary services.
Moody's ratings incorporate the company's intentions to invest heavily in the expansion of its existing ports and development of new facilities around the world.
However, ratings do not assume further acquisitions, particularly if debt-financed, and indeed DP World's achieved global presence alleviates any immediate need for further significant expansion. The company continues to pursue its international expansion strategy with small-size acquisitions and important agreements.
In June 2008, DP World expanded its European operations by acquiring 60 per cent of Contarsa Sociedad de Estiba SA, a company that holds the exclusive concession for Tarragona Container Port Terminal in northern Spain. In December 2007, the company acquired a 90 per cent stake in Egyptian Container Handling Co (Echco) for $670 million.
Echco is the controlling shareholder of Sokhna Port Development Company (SPDC), which is the closest container port to Cairo and is located in the North West Suez Economic Zone, the first free zone in Egypt encompassing an area of around 90 sq km.
In October 2007, DP World signed the final agreement for the management of the Dakar container terminal, Terminal à Conteneur, and the development of a new container terminal at Port du Futur in Senegal.
During the second phase, additional investments of around $400m will be required to build the new Port du Futur, which will have a capacity of around 1.5 million TEU and will be operational by early 2011.
In May 2008, London Gateway, which is owned by DP World, obtained approval from the government for the development of the UK's most advanced container port, which incorporates Europe's largest logistics park. The construction works will start on a 1,850-acre site near Stanford-le-Hope, in South Essex. DP World will invest around £1.5 billion (Dh11bn) in the project, which makes it one of the largest foreign investments in the UK.
Moody's believes these international expansion projects are consistent with the overall strategy that DP World is pursuing in order to further broaden its already well-diversified portfolio.
"DP World will be taking on more debt to fund these projects, but at the same time we would expect debt-financed acquisitions to be of a scale that would not materially weaken the company's financial metrics outside the ratio guidelines that we have indicated for the company's current fundamental credit profile as expressed through its baseline credit assessment (BCA) in the Baa range," Moody's said.
DP World's A1 ratings are supported by the company's well-diversified, global operations and strong market position; its good customer relationships as well as its well-balanced portfolio that predominantly consists of origin and destination (O&D) traffic rather than more cyclical transhipment traffic.
The operational and financial performance of its domestic operations thereby represents the backbone of the group's fundamental creditworthiness, given the high margins and throughput that are achieved there. However, the expectation of rising leverage due to an ambitious investment plan constrains ratings.
Conversely, ratings are constrained by general risks inherent in the industry, such as the exposure to the global economy, although this is somewhat mitigated by DP World's strong diversification and focus on less volatile O&D traffic, as well as the customer concentration that is typical for the industry. More importantly, however, ratings are constrained by the expectation of rising leverage and a more aggressive financial profile as the company executes its expansion programme.
As the world's fourth-largest container terminal operator after Hutchison in Hong Kong, APM Terminals of Denmark and Singapore-based PSA International, DP World has an estimated global market share of 9.2 per cent and ranks amongst the so-called "big four" operators that are truly global.
These four companies are estimated to have a combined market share of around 44 per cent, with the remaining 66 per cent still held by fragmented, regionally focused operators.
Approximately three-quarters of DP World's global traffic volumes are O&D rather than more cyclical transhipment volumes, whilst most of its equally sized competitors show greater exposure to the latter. O&D traffic tends to be primarily dependent on the economic conditions in the region of origin and the local market [destination], thereby providing greater protection from competition.
DP World's geographic diversification is strong, with throughput well balanced between the UAE, Middle East, Europe, Africa, Asia-Pacific and the Indian Subcontinent, and a good mix between the more mature and competitive markets in Europe and Australia and the emerging markets of India, South America and Eastern Europe.
At the same time, customer concentration is high, though better than many of its peers, with the largest five and 10 customers representing close to 42 per cent and 60 per cent of traffic, all of which are global shipping lines.
While exposure to the cyclical shipping industry constitutes a risk, this is somewhat mitigated by the fact that trade volumes remain fairly independent of the financial health of the shipping companies.
Moody's recognises that DP World's Jebel Ali Port in Dubai, which is the seventh largest container port in the world, still constitutes the backbone of the group, representing more than 20 per cent of 2007 throughput and, in Moody's view, contributing a significantly larger overall proportion to revenues and earnings.
Global container port capacity utilisations are currently running at around 85 per cent, with headroom particularly tight in the growth regions of the Middle East, Africa, the Far East and South East Asia.
Given the current growth and known capacity expansion plans, global capacity is widely regarded to reach 100 per cent by 2011, thereby forcing all major operators to extend capacities. The material under-capacity in the sector also acts as a cushion for any global economic slowdown over the coming years.
In Moody's view, DP World is likely to benefit from these developments, particularly given its strong position in the Middle East and Asia, and especially in China, where it operates five ports (including two in Hong Kong).
Port tariffs are commonly subject to market forces, although some countries (including India) have regulated tariffs, which, however, are based on a minimum return, said Moody's.
Capacity holds keyIn many regions, capacity shortages are anticipated, including the Middle East, the Far East, Southeast Asia, South Asia and Africa.
DP World aims to exploit these opportunities by driving organic growth/expansion at its existing facilities and by developing new ones, says a recent Merrill Lynch report.
Capital expenditure is expected to increase over the next two to three years as DP World develops new terminal facilities, with a focus on projects where the company can exercise day-to-day control.
The company estimates a total $4.1bn in capex spend from 2007 to 2010.
Positively though, maintenance capex is expected to reduce in the short term, due largely to the age of the asset base.
It is likely, however, that DP World will
need to continue to invest in its port operations and develop new facilities to maintain competitiveness.
Scorecard
DP World's financial performance in 2007 was strong, reflecting increased capacity and volumes. Revenues reached $2,731m, up 32 per cent from 2006. This growth was due to rise in volumes, which were up 18 per cent in 2007, and the improved revenue per TEU in several terminals, particularly Jebel Ali.
EBITDA rose 56 per cent to $1,100m from $705m in 2006, which translated into an increase in EBITDA margins to 40 per cent from 34 per cent in 2006.
The growth in the company's profitability margins was mainly due to the improvement in capacity utilisation, which stood at 85 per cent for consolidated terminals, as well as greater contributions from associates and joint ventures.
DP World exhibits a strong liquidity profile with cash and cash equivalents available at year end 2007 of around $3bn. This strong cash position coupled with cash flow generation, which is expected to remain strong, should guarantee the company meets capex requirements over the next 12 months.
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