DP World will be largely unaffected by a United States recession, according to a report from Morgan Stanley.
The US investment bank is bullish about the port operators’ prospects, saying recession-driven slowdowns typically only hit container shipments for one year. DP World has only indirect exposure to the United States, with all its operations based in Europe, the Gulf and Asia. “The impact of a 2008 US recession on DP World should be minimal,” the report said.
However, investors are currently unwilling to pay for the long-term growth of the company, while volatile markets have punished high-multiple stocks, especially newly-listed companies, Morgan said.
It urged DP World to improve its financial disclosures, with the company currently planning to report earnings on a half-year basis.
More regular reporting would also offer investors greater reassurance and would help its share price, Morgan claimed.
“Details on performance at the terminal level would help investors better understand margin evolution with planned capacity additions,” said the report.
Morgan offered a price target of $1.10 for DP World and a long-term fair value of $1.29. However, in its worst-case scenario, the real value of DP World shares could be just $0.65. “We also do not dispute the long-term attractiveness of the stock, [but] we think that upside for the stock is limited in the near term,” the report said.
DP World has been pursuing an aggressive acquisition strategy and Morgan estimated that if the company was to increase its capacity by 4.5m TEUs through further purchases, this could add $0.17 to its share price. A TEU is a twenty-foot equivalent unit, the benchmark for measuring turnover in ports operations.
DP World is trading at a price to earnings ratio of 35, based on 2008 estimated profits, which is higher than its competitors.
However, then this figure is adjusted for future expansion, the stock looks better priced, with a price to earning growth ratio of 0.92, compared to the industry average of 1.02. “We believe that strategic port acquisitions could provide further upside given DP World’s access to cheap finance,” said Morgan Stanley report.
Jebel Ali port provides a third of DP World’s revenues, despite the firm operating in more than 40 countries worldwide.
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