Citi cuts long-term price target for DP World with a buy recommendation
DP World has struggled since listing on the Dubai International Finance Exchange in November and yesterday closed up 2.6 per cent at $0.79, some 39 per cent below its initial public offering price of $1.30.
The stock’s sluggish performance has led Citigroup to cut its price target by 12 per cent from $1.25 to $1.10, while also giving DP World a buy recommendation with medium risk.
“We find the poor performance of DPW surprising given its relatively defensive business model and its emerging markets bias in particular to the Middle East,” a Citi report states. “With equity markets increasingly focused on short-term risks and downside, we expect the market to ignore or heavily discount sources of long-term value.”
The United States lender says the ports operator’s IPO valuation has fallen as short-term fears override long-term prospects. The latter remain bullish and are “superior to many other infrastructure segments by virtue of strength of likely long-term organic volume growth, benign regulation, high returns and a full pipeline of potential projects,” Citi says.
The global ports sector enjoyed a unbroken period of expansion from 1980 to 2007, with a compound annual growth rate of 9.7 per cent over this period.
This drove high demand for increased terminal capacity and higher productivity.
“The market has little experience of what happens to volumes, profits and cash flow through slower growth period,” Citi warns.
This uncertainty has seen sentiment for the ports sector sour in the midst of an economic downturn in developed markets, with DP World shares falling on “perceived rather than actual exposure to US trade”.
The two largest trade lanes, which are the trans-Pacific and Asia-Europe routes, have slowed in the first half of 2008, further increasing investor pessimism.
But DP World estimates that no more than 1.5 per cent of its TEUs (20-foot equivalent unit, the ports industry benchmark measurement of container size), were between Asia and the US.
“We do not believe fundamental valuation of DP World is materially reduced by a period of slower economic growth from assets and concessions with long-term earnings power,” Citi says.
“We expect the business model to be relatively resilient (as temporary labour costs can be quickly reduced in both instances if volumes drop sharply), it is well capitalised and long-term structural drivers such as outsourcing, privatisation, liberalisation or globalisation should continue to compliment trade growth.”
DP World is expanding faster than the industry average. Consolidated TEUs increased by 21 per cent in the first half of 2008, although this figure falls to 11 per cent if its new concessions in Sokna, Jeddah and Dakar are excluded.
Citi forecasts DP World revenues will increase by 18 per cent over the same period, thanks most notably to favourable foreign exchange rates and price increases.
This will translate into earnings per share to grow 132 per cent to $1.55 in the first half of this year, Citi predicts.
DP World will release its first half results on August 28.