Report: DP World has long-term strength

Report: DP World has long-term strength    Terminal operator DP World’s long-term prognosis should outweigh near-term trading concerns, said an investor’s report released this week by HSBC Global Research.
   The report also forecast that throughput at major ports globally will be down 3 percent in 2009.
   “Our forecast is based on the assumption that a contraction in global trade generally may be similar to that in the early 1970s, but that this time, containerization and structural growth will not sustain growth in the flow of containers,” the report said. “If we are correct with our forecast, this would represent the first period of contraction from 1972,' from when reliable data was first collected.
   About DP World, HSBC projects that utilization levels at Jebel Ali port, the operator’s flagship facility in Dubai, will drop from 92 percent in 2007 to 78 percent in 2009. Incidentally, that could have a significantly positive effect on operations for shippers and carriers, since terminals are designed to run most efficiently at 80 percent utilization rates. Revenues from Jebel Ali constitute roughly 30 percent of DP World’s group earnings, HSBC said.
   In the context of its rivals — namely Hutchison Port Holdings, PSA International and APM Terminals — DP World has a geographically balanced portfolio of terminals. While 35 percent of its throughput came from terminals in the Middle East, it also has solid foundations in the Far East, Southeast Asia, Europe, the Indian Subcontinent and the Americas. Only APM Terminals had as reasonably balanced a geographical footprint, the report said.
   “DP World has an unrivalled global network, with significant expansion plans in developing markets,” HSBC said. “It is well placed to capture renewed growth in global trade.”
   On the whole, the report painted a picture of a solid company facing a difficult year.
   “Container handling by ports is likely to get weaker in the coming months,” the report said. “DP World is not immune and we have prudently cut our 2009 and 2010 forecasts to reflect this. However, we take a 12-month view and believe that the strategic value of its expanding terminals network, long-run capacity constraints in the industry and a valuation which is now in line with the sector, warrant an upgrade.
   “We believe that the long-term prospects for the industry are still good, and that DP World should outperform its peers. Capacity is constrained and ports are likely to be a focus of many of the fiscal stimulus packages currently being rolled out by governments. DP World appears to have no funding issues, with 80 percent of the value of its debt with maturity dates beyond 2012.”
   HSBC said terminal operators may suffer less than other supply chain industries because many have natural monopolies.
   “Terminals operators, due to their natural monopoly, often enjoy a good degree of pricing power,' i.e., limited substitution and few direct rivals, HSBC said. “Moreover, inflation is falling, which will help operating and project costs. Fiscal stimulus by governments should benefit ports and their transport links.”
   The report said that about three-quarters of DP World’s volume is origin-and-destination cargo as opposed to less lucrative and reliable transshipment cargo. At the end of 2007, it had 9 percent market share in the global terminal operating arena.
   While DP World is not immune to the projected decline in demand for container terminal services, the report it should “just outperform the market.” That said, 2009 would see the company’s operating revenues stagnate for the first time.
   “We forecast that DP World will generate operating profits of $834 million in 2009 (profits were $737 million in 2007 and $842 million in 2008),” HSBC said. “Our 2009 forecast has been cut by 17 percent. In 2010 we forecast operating profits of $933 million, a cut of 21 percent. Trading in the next few quarters for DP World will weaken; therefore timing is an issue with deciding to invest.” ' Eric Johnson