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Tuesday, 30 September 2014

Investing for the future

Demand for improved infrastructure is driving investment in ports Demand for improved infrastructure is driving investment in ports

Globally, there is a huge demand for investment in infrastructure. This is especially true in the transport sector with modern rail, highway, airport and maritime port facilities considered key to a nation attracting investment in its industry and commerce and in it providing its citizens with the foundations for sustainable economic growth.

Efficient ports, in particular, are critical for a country’s trade as about 90% of international commerce is moved by ship. With vessels getting bigger and global trade rising, this means building new ports and upgrading existing ones by dredging deeper channels, building longer berths and constructing wider storage yards. Invariably, it also means developing warehousing/logistics facilities that are capable of providing value-adding assembly and distribution services for its customers.

Add to this, the increasing need to install semi-automated and/or fully-automated handling equipment, more sophisticated terminal management and security systems and it is obvious that capital requirements for modern ports and cargo-handling facilities are substantially greater than they were a decade ago.

This is particularly so of container terminals where billions of dollars are being ploughed into a variety of projects by operators such as APM Terminals, DP World, PSA International, Cosco Pacific and China Merchants Holdings International.

But intense competition in the shipping industry, particularly the container sector, is eroding port managers’/operators’ fiscal margins and stiffer competition within port regions and ports themselves, owing to widespread privatisation and the granting of concessions, means port managers/operators placing an increasing focus on controlling costs. Nonetheless, it is important to note that profit margins in the terminal and ports businesses are still among the highest in the maritime industry.

Additionally, individual companies are cleansing their portfolios by focusing their investments on those operations offering the best long term growth opportunities and expansion potential, with DP World selling out of both Australia and Hong Kong.

It begs the question: Is the international terminal operating sector going to face the same pressure to consolidate as the liner shipping industry. Is a new breed of investor about to enter the sector? Can ocean carriers still justify investing in container terminals as cost centres and as tools for improving their operations? Is it sufficient these days for companies to only manage ports and cargo stevedoring services, or is a presence in the upstream logistics business a necessity.

This feature focuses on the first two elements only.

Clearly some of the changes taking place today are a consequence of the credit crunch associated with the global financial and economic crisis of 2008-09 and the constrained bank liquidity ratios that have prevailed since, especially in Europe. Consequently, a wider range of equity finance is now being used to finance terminal projects, including mergers and acquisitions, share issues and portfolio sales.

Some companies are issuing project bonds on the capital markets to raise funds while export credit agencies are also involved in providing financial support for some developments. Elsewhere, sovereign funds and state investment vehicles have become more active in the port sector, with the Abu Dhabi Investment Council, China Investment Corp and Government of Singapore Investment Company among those funds investing in ports.

Meanwhile, the past 12 months has seen renewed interest in the port, shipping and logistics sectors by pension and equity/hedge funds. The former, in particular, see port and infrastructure projects as proving stable income and as a protective device against inflation.

Toronto-based Ontario Teachers' Pension Plan is one of the largest investors of this type in the ports industry with its flagship operation comprising Global Container Terminals which owns box-handling facilities in New York and Vancouver (Canada).

To some extent, these fiscal entities are taking the place of ocean carriers that have been selling stakes in their terminal operations to raise cash to buy ships and prop up stretched balance sheets. But they have also become important partners of some specialist global terminal operating companies that have been looking for support to continue with their heavy capital expenditure programmes in particular facilities.

According to Drewry Maritime Research’s latest annual report on the container terminal industry, there is no shortage of investor interest in the sector.

Neil Davidson, senior analyst in Drewry’s ports and terminals practice, elaborated: “The sector’s strong financial performance and accelerating growth is encouraging new market entrants and renewed merger and acquisition activity in the container ports sector. Financial investors are particularly active at present, attracted by typical EBITDA margins of between 20% and 45%.”

While the analyst does not see any significant change to the world order of container terminal operating companies in the short term, with PSA, Hutchison Port Holdings, APM Terminals and DP World occupying the top four positions, he believes the aggressive expansion programmes of operators, such as International Container Terminals Services Inc (ICTSI), Gulftainer, Bollore Africa Logistics and Yilport will elevate their position in the league.

He also stressed at most portfolio expansion will be through greenfield or brownfield terminals in emerging markets, led by APM Terminals, ICTSI, HPH and DP World.

That is not to say that developments are not taking place in the developed economies and it is here where some of the most far reaching ownership changes are occurring.

Take the US, for example, where activity is returning to the frenetic levels of the early 2000s when valuations for container terminals were at their most expensive pushing 20 x EBITDA. Some of the most notable deals this year have included:

* Brookfield Asset Management buying 50% of APM T’s Port Elizabeth facility from APM T

* Alinda Capital Partners and the UK-based Universities Superannuation Scheme buying APM T Virginia facility in Norfolk

* Mitsui OSK Lines selling 49% of its stake in TraPac to Brookfield Asset Management

* Goldman Sachs selling its 49% stake in Stevedoring Services of America holding company , eventually acquired by Mexican entrepreneur Fernando Chico Pardo

* Ports America buying 30% stake in International Terminal Services from Japan’s K Line

Drewry attributes the US buying spree to a combination of factors, including more highly attractive EBITDA ratios, now typically in the 8-12 times range, the country’s high tariffs, which means absolute EBITDA margins per box are significant, the US’s reputation as being a stable location in which to invest and the gathering pace of automation in terminals which could reduce labour costs.

Drewry believes merger and acquisition levels in the US will continue as financial pressures on ocean carriers lead them to dispose of more of their terminal assets and investors that put money into terminals in the mid-2000s are looking for exit strategies as their funds reach maturity.

The ownership structure of the world’s container ports may be changing, but the fundamentals appear good with solid growth expected to continue. Indeed, Drewry expects global throughput to be approaching 850 million TEU in 2018, up from 642 million TEU. With long-term growth forecast to be between 5% and 6% per annum, keen investor interest in the sector seems assured.


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