DP World, currently trading at $0.85 (Dh3.12) on the Dubai International Financial Exchange (DIFX), is forecast to appreciate its value by 36 per cent through 2009, a recent equity report said.
The Global Crown Capital Equity Research has covered Dubai Ports World with an overweight rating and a $1.16 price target, which is based on a P/E of 35x2008E (35 times the 2008 earnings estimate) earnings.
It said DP World’s 17 per cent growth which is significantly above the port industry’s 11 per cent will continue as the company has only indirect exposure to the slowing US market, a view that has been shared by investment bankers.
Morgan Stanley earlier said DP World will be largely unaffected by a US recession, saying recession-driven slowdowns typically only hit container shipments for one year. Also, all of DP World’s operations are based in Europe, the Gulf and Asia.
“We believe investors will come to understand the superior earnings growth and expansion possibilities of DP World are worth a premium valuation,” Global Crown Capital said, noting that DP World is expected to increase its earnings before interest, taxes, depreciation and amortisation (EBITDA) rate from 30 per cent in 2006 to 36 per cent in 2009.
“With more than $16.5 billion of assets and $3.3bn in cash, DP World has the capital it needs to grow. In the past six months, the company has generated nearly $500m in net cash from operations and we expect this to continue,” it added.
The growth could be further accelerated if the company continues to acquire terminals and operations, the report said.
“There are a number of acquisitions and given the management’s approach, we would not be surprised to see a couple over the next few years,” it said.
“DP World’s expansion plans focus on the Middle East and Europe, while it is also looking to grow in China and South America. We believe DP World will make another play for some US operations in the coming years once the current isolationism diminishes there.”
DP World has been pursuing an aggressive acquisition strategy with the company planning a growth of 173 per cent through further purchases. DP World, the world’s fourth-largest container terminal operator, in November raised almost $5bn in the Middle East’s biggest initial public offering, valuing the group at $21.6bn.
The 23 per cent of the company was priced at $1.30 a share, the top of the indicative price range, after the offer was more than 15 times subscribed. The strong demand for DP World’s shares was thought to be the latest sign that investor appetite for infrastructure assets remains strong despite the global credit squeeze.
It was also hoped the DP World listing would boost Dubai’s new exchange, Dubai International Financial Exchange, where the group was listed.
However, the stock has dropped 29 per cent from its $1.30 IPO issue price and is failing to attract the trading volumes the fledgling bourse seeks. Though the prediction casts an air of optimism, the $1.16 target price is not that satisfactory for some investors and analysts.
“The $1.16 target is still lower than its initial pricing offering,” Eckart Woertz, programme manager, economics, Gulf Research Centre, told Emirates Business.
“And since DP world’s operations are mostly transportation, they could still be hit by the US recession, as when there’s a recession it means there’s a slowing down of the transport business.”
The Global Crown Capital report banks its optimism on the expected continued growth of DP World, the maturing economies of Asia, the growing global trade and the increasing popularity of DIFX.
The global GDP, the research said, is expected to grow, fuelled by the growing economies of India and China, which would need to ship more goods. The Middle East is also expected to move to more balanced economies, with manufacturing and consumption increasing.
Container ships do not transport oil but when these economies move away from oil they may need container ships. It is expected TEUs (a TEU is a twenty-foot equivalent unit, the benchmark for measuring turnover in ports operations) will see a significant increase as the Asian economies mature and consume more products from North America and Europe.
Shipping lines move full containers from Asia to America and Europe. Moving back the empty containers represents a revenue opportunity if there is more products to be moved back to Asia.
As much as 14.6 million extra TEUs would have been shipped in 2006 if the empty containers were filled. This would add significantly to shippers’ bottom lines. Figures from the firms’ actual flows of trade show that global trade is in an upward trend, supporting the port operators.
“When trade, foreign investment and income to foreign nationals are considered as a percentage of GDP, one can see the nearly linear growth of global trade we do not expect this trend to slow,” it said.
Global Crown Capital said investors are also not yet familiar with the DIFX and over time more investors will learn about the bourse and this will lead to more demand and higher valuations.
The length of the education process is “not clear” but it will be accelerated as more international companies list on the DIFX, it said.
“DP World is an anchor stock for the DIFX. Many investors do not know it and are not participating. Over time we believe the information will flow out and investors will begin to have more confidence that is on a par with London and New York-based exchanges,” it said.
DP World is the fourth largest marine port operator, and nearly twice the size of the next largest, Cosco. Hong Kong listed-Hutchison Port Holdings is the largest player followed by AP Moller Container Terminals (part of Maersk Group) and Singapore’s PSA International. Last year, DP World handled 43.3 million TEUs across its portfolio of 42 terminals, a surge of 18 per cent from 2006.
The Middle East, Europe and Africa region grew 19 per cent. Terminals in the UAE increased throughput by 19 per cent to 11 million TEUs, with the two Dubai ports of Jebel Ali and Port Rashid combined growing 20 per cent to reach 10.7 million TEUs.
DP World Jebel Ali alone grew more than 25 per cent, reaching 9.9 million TEUs. This was due to new vessel calls as well as the opening of a new second terminal at the port in the second half of 2007.
The Asia Pacific and Indian Subcontinent region recorded more than a 17 per cent increase as many of the terminals expanded capacity and continued to improve productivity and efficiency to serve those markets’ rapid growth in containerised cargo. The Americas and Australia region delivered a growth of 18 per cent, with all terminals in the region performing well.
Global Crown Capital estimates DP World’s gross throughput for 2008 will be around 49.6 million TEUs, up by 13 per cent year-on-year. For 2008 and 2009, the firm said it has taken a conservative approach model, with only 10 per cent revenue growth each year.
Global trade is also expected to be the wind pushing forward all large terminal operators, while port operations are slated to grow to EBITDA $827 million in 2008 and $1.08 billion in 2009, the report said.
Terminal operators, driven by projected supply and demand imbalance, could expand faster than currently projected, it added.
The biggest challenge facing the company is keeping pace with demand. One of the main challenges for container terminal developers, in view of the current breakneck growth rates, was how quickly they could construct new facilities, Mohammed Sharaf, Chief Executive of DP World, said.
DP World has committed to all the projects designed to double capacity and is looking at others, suggesting its future growth rates over the next decade will be even greater.
Since it takes only about two years to build a new ship and between three and five years to build new port facilities, shipping capacity has been growing far faster than port capacity, putting pressure on the most popular facilities.
DP World faces particular challenges in Dubai, where delays are emerging as a result of congestion created by year-on-year growth, currently running at 30 per cent.
The rapid growth has forced the company to bring forward the second phase of a new terminal, Terminal Two, whose first phase, capable of handling 2.5 million twenty-foot equivalent units of containers a year had opened only in August.
It is also accelerating work on Terminal Three, which it had previously thought would not be needed until 2013.
“The difficulty is not due to anything but the growth we are facing,” Sharaf said.
$16.5bn: Is the value of assets held by DP World. In the past six months the firm has generated nearly $500 million in net cash from its operations
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