DP World's revenue set to rebound this year
The long-term growth story remains intact for the global port operator, DP World, analysts told Emirates Business, maintaining a buy rating of the stock.
The major growth drivers for the company's earnings are its presence in fast-growing emerging markets, continued port expansion, pick up in the global trade and shipping conditions, and positive GDP growth outlook in some major markets around the world, they said.
"The global GDP is forecast to grow by 2.6 per cent for 2010 and emerging markets are expected to outperform global GDP growth. A combination of a better macro backdrop for global trade, with the company's ongoing port expansion around the world would increase its volumes as well as Earnings Per Share (EPS). DP World has progressed with its aggressive capital expenditure that has put it in a strong position to mop up any increase in demand in world trade," said Ian Munro, Head of Research, Mac Capital Advisors, Dubai.
Yesterday, Mac Capital Advisors came out with a research report maintaining overweight rating on DP World. "We are maintaining our overweight recommendation on DP World and have upgraded our 12 month price target to $0.66 on the back of forecast earnings uplift during 2010 and the pending London listing," the report said.
DP World reported a six per cent fall in Q3 2009 container volumes, taking total volume declines for nine months of 2009 to eight per cent (year on year). These are in line with our expectations and represent an improvement on H1 2009 volume declines, highlighting the stronger trading conditions, driven by government stimulus packages and tentative signs of a pick up in global manufacturing and industrial production activity, it said.
"We believe that 2010 would be a year of DP World's earnings recovering and it is going to be a turning point for the company. In H1 last year, there was a decline of 33 per cent in year-on-year earnings, but we doubt continuation of that downtrend on its earnings. If we don't see an uptick in H2 2009, we are likely to see it in the first half of 2010," said Ali Asif Khan, Managing Director & Head of Brokerage, Arqaam Capital.
Arqaam Capital has also maintained a buy rating for DP World. "The stock is up 43 per cent from June last year and has outperformed the DFM index, which is down almost 11 per cent during the same period," said Khan.
"We have been bullish on DP World's stock since the second half of last year. The reason lies in the recovery in the world trade activity. We continue to see strong GDP growth numbers coming out of China as well as positive GDP growth in the US in Q3, with the consensus for a positive growth in Q4 as well. We have also seen positive recovery in trade activity in the eurozone," he said.
Generally, recovery in trade translates into greater movement of goods, which in turn means we would see increase in activity at the ports. And DP World offers a perfect proxy to that recovery in world trade. We should see improving tip line and operating margins going forward on DP World, he said.
The likely changes for DP World over the coming 12 months include possibility of a higher dividend-payout ratio. DP World board is seeking premium listing on London Stock Exchange, and we expect this to improve liquidity and the stock's exposure to a wider audience of European and US based investors, said Mac Capital report.
With ongoing port expansions across India, Pakistan, China, South America and the Mena, we expect DP World to benefit from the upswing in emerging market trade activity likely to occur during the coming 12 months. With around 75 per cent of earnings leveraged to emerging markets, DP World deserves to trade on high valuation multiples, considering its strong cash flow generating capacity and stable funding, the report said.
It said extensions of ports at Jebel Ali, Doraleh (Djibouti), Ho Chi Minh City (Vietnam) and Callao (Peru) are still on track for completion. London Gateway, put on hold earlier, has been revived and DP World bought the remaining 1,000 acres of land for $220 million (Dh808m) this month.
Worldwide, we expect DP World to add 3.2 million and 2.2 million TEU worth of capacity in FY 2009 and 2010 respectively. Capex for H1 2009 was $516m, on track to reach our FY2009 target of $880m (excluding $220 million for London Gateway), it said.
Other long-term growth drivers for DP World include pick up in shipping conditions and stabilisation in GDP growth and improving consumption and investment trends in Europe, America and Australia.
"We believe that DP World is on track to post FY 2009 revenue of $2,776 million (-15.4 per cent) and net profit pre minorities of $323.8 million (-39 per cent). With container trade volumes improving during Q3 and the company having stripped significant costs out of the business, we expect that top line growth and the benefits of scale and operating leverage will return during FY 2010," the report said.
"We anticipate an eight per cent rebound in FY2010 revenue for DP World, based on five per cent gains on average realised prices and steady capacity utilisation (including 2.2 million TEU worth of new capacity in FY2010). Earnings are likely to rebound during FY2010 to $455.5m (+41.3 per cent) on higher volumes and more favourable supply conditions in the shipping industry, leading to profit margins stabilisation and greater demand for ancillary services," it said.
The report, however, outlined a few risks to its valuations as well.
Despite the recent minor increase in freight charges by some operators, further declines in shipping rates during FY 2010 could adversely impact terminal margins and DP World's profitability, it said.
Further, the top 10 customers of DP world generate about 60 per cent of the company's gross throughput. This creates some concentration of earnings risk. Loss of any one of these customers, owing to factors such as consolidation of major shipping lines, could adversely affect revenue and earnings growth, it said.
Nevertheless, the report forecast DP World would experience strong EPS growth from FY 2010 onwards; as the company's ongoing terminal expansion plans are buoyed by a likely revival in world trade volumes.
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