Drewry Maritime Equity Research takes a positive view on the global port sector thanks to an improved outlook for a global economic recovery, driven by areas of favorable supply demand dynamics.
Container trade is predicted to grow by 4.7% this year and 5.7% next year, reaching 684 million teu by the end of next year, according to the latest forecasts from Drewry. Port capacity is only expected reach 994 million teu by 2014 increasing at a CAGR of 3.9% since 2011, which will nudge average utilization up to 69% in 2014 from 67% in 2011.
However, there will be wide regional variations, leading to very different utilization levels across geographies. Emerging regions such as Far East and Southeast Asia will see much higher average utilization of around 75% next year, while muted demand in Western Europe will keep the average down at 57%.
This was certainly the case in early 2013. A sharp increase of 6.4% in share prices of the major port companies under coverage was recorded, buoyed by positive market news and attractive valuations. But that average hides a huge divergence, with DP World surging ahead by 34% and ICTSI following with 22%, but Dalian Port Corporation (-8%) and Hamburg Hafen and Logistik (-6%) lost value.
Drewry Maritime Equity Research’s shares to watch for 2013 are Cosco Pacific (1199 HK) and HHLA (HHFA GR). Cosco Pacific is well positioned, given its stable revenues from container leasing, its exposure to the Bohai Rim and early signs of the Chinese economy bottoming out as the global trade recovery gathers steam. Impressive volume growth at Piraeus in 2012 further corroborates this view. COSCO Pacific trades at 8.6x 2013E EV/EBITDA against a sector average of 9.7x, while Drewry’s fair value of HK$14.1 implies 35% upside from the current levels.
Drewry also favors HHLA as it is attractively valued at current levels. The company has a strong presence to serve its immediate hinterland traffic, while it also stands to benefit from the growth potential in the transshipment market of the Baltic Sea. Encouraging news on Elbe River dredging will be positive for the stock. We see a 34% upside for HHLA as stock is trading at a deep discount to both Drewry’s fair-value estimate at €22.4 per share and sector multiples.
Drewry has taken a cautious stance on Santos Brasil (STBP11 BZ) and ICTSI (ICT PM). Santos Brasil will face headwinds as it expects new terminals (BTP and Embraport) to start operations in 2013. Uncertainty regarding extension of the concession for TECON, the company’s flagship terminal at Port of Santos, is also a serious concern. Despite 14% upside potential at current levels with a fair value for Santos Brasil at R$33.6 per share, Drewry has noted that regulatory uncertainty and intensifying competition will increase the risk and do not fully compensate for the undemanding valuations.
On ICTSI, in spite of a solid fundamental story, the stock is richly valued at current levels. ICTSI has outperformed sector returns by a wide margin in 2013 and current valuations do not support further upside potential. The company is trading at 13.3x 2013E EV/EBITDA compared, with an industry average of 9.7x, which given the higher risk profile of its new assets is questionable.
On an aggregated basis, Drewry Maritime Equity Research expects the 12 ports under coverage to deliver 8.4% growth in sales, 10.8% growth in EBITDA and net income growth of 14.3% in 2013. Aggregate market capitalization of $54.2 billion implies 2013 EV/EBITDA of 9.7x for the sector. Aggregate dividend yield will be 3.2%, according to our estimates.
*All financial figures are based on the closing share prices as on April 17, 2013.