DP World is undoubtedly a key barometer when it comes to measuring the overall economic health of the UAE.
The global ports operator reported an 82 per cent increase in year-on-year net profit last month and a large slice of the UAE's gross domestic product (GDP) passes through the firm's Jebel Ali facility.
As an investment opportunity, analysts largely expect DP World's stock to produce healthy returns in 2012 but warn of potential risks if growth rates in the global economy should falter.
DP World has a 25.5 per cent weighting on the FTSE Nasdaq UAE20 Index — the largest for any member of the bourse.
"We value DP World at $13.6 (Dh 49.95) per share using a combination of discounted cash flow (DCF) and peer group multiples," said Redwan Ahmad, vice-president of equity research at Egyptian investment bank EFG-Hermes. "We believe continued volume and revenue growth will drive the share price, helped by the exposure to high growth economies," he added.
Redwan says EFG-Hermes' DCF value implies a price of $13.9 per share and its peer group multiple offers a price of $13.1 per share. EFG-Hermes uses a weighting of 60:40 in favour of DCF as it has a 40-year concession profile.
"The company has already had a good start to the year with volumes growing by 11 per cent in the first two months. Key risk is a slowdown in the global economy, which will affect trade flows but we believe container volumes will show some resilience," Redwan said.
"On a P/E [price-to-earnings] basis, DP World trades at 10 per cent to the sector but we believe it should trade at a premium given it has most of its ports in the faster growing emerging markets."
DP World, which has a dual listing on Nasdaq Dubai and the London Stock Exchange, said last month its 2011 net profit was $683 million (Dh1.7 billion) after separately disclosed items, up from $375 million in 2010. It also said growth had been fuelled by an improvement in global container volumes and a continued focus on emerging markets. The company recorded a profit of $484 million in 2011 from the part-sale of its Australian operations, the company's earnings report showed.
In 2010, DP World sold 75 per cent of its Australian operations to private equity firm Citi Infrastructure Investors (CII) as it tried to reduce its debts. Adjusted earnings before interest, tax, depreciation, amortisation (Ebitda) increased 19 per cent to $1.3 billion. Revenue for the year dropped by three per cent to $2.98 billion.
"DP World is one of the UAE's most established companies and the crown jewel of Dubai World," said Samer Darwiche, associate equity analyst at Gulfmena Investments. "The firm's activities extend around the world and more than 45 per cent of its revenues are from outside the Mena [Middle East and North Africa] region," he added.
According to Darwiche, DP World is a stock that institutional asset managers favour because its performance is related to bets on the recovery of the global economy, along with an increase in shipping activities. However, he also said liquidity levels remained a concern as the firm has no intention to increase the size of the free-float available to investors.
Low liquidity
"DP World is trading at a discount of its global peers which is mainly attributed to the somewhat low liquidity of the stock which is acting as an overhang for investors," Darwiche said.
"DP World should then trade at a price-to-book ratio of 1.6x — lower than the global average — to incorporate a liquidity discount. A price-to-book ratio of 1.6x would give the company a price target for 2012 of $14.37. The stock is a proxy for investors who bet on global economic recovery and a pick-up in shipping activity," he added.
Amid concerns over liquidity levels on Nasdaq Dubai, DP World made its debut on the London Stock Exchange last year by listing a series of depository interests or quasi equity. However, the company is not be eligible for the FTSE 100 Index — despite qualifying with its market capitalisation of around $11 billion — as it is ruled out on grounds of non-UK incorporation and the small size of the free float.
"DP World is an interesting asset; it has excellent long-term prospects, but a majority of investors are not likely to capitalise simply because they have much shorter investment horizons. This firmly includes so-called institutional investors, which are for the most part quite retail in their behaviour," said Ebrahim Masoud, senior investment officer at Mashreq bank.
According to Masoud, DP World's current valuations — at around 11 times Enterprise Value/EBITDA for next year's forecasts — reflect the fact DP World is one of the largest marine terminal operators in the world.
"Utilisation across DP World's portfolio has been strong and rising, margins have been improving, and the company is also looking to increase pricing. Add in the 25 per cent capacity addition through to 2014, and the medium term looks a bit better," Masoud said.
DP World was trading at $11.65 on Nasdaq Dubai yesterday while in London the company's stock stood at 720 pence per share. DP World is one of the most traded companies on the Nasdaq Dubai but total trading volumes on the exchange have dropped in recent years, reflecting a general trend in Middle Eastern markets.
Premium listing
DP World became the first Dubai-based company to obtain a a premium LSE listing and other UAE firms have since followed in its footsteps. NMC Health, an Abu Dhabi-based health care provider, raised £117 million (Dh689.2 million) in an initial public offering earlier this year as it listed shares in London.
"Longer term, DP World's London listing should improve stock liquidity, which at present is quite modest at less than $2 million over the past few weeks. The limited free float of less than 20 per cent is also a small long-term hurdle, which should get addressed as the government further monetises this asset," Masood said.
"DP World is a long-term story simply because its business is very stable, and even significant improvements accrue over time. We believe only genuinely patient investors focused on an appropriate long-term horizon will truly capitalise on the excellent business fundamentals of the company," he added.
DP World also has several long-term projects in the works that may appeal to investors. The company said last year it will invest another $1 billion (Dh3.67 billion) in the London Gateway project over the next three years, which will create 36,000 jobs.
The development is set to open in the fourth quarter of 2013 with an initial capacity of 1.6 million TEU (twenty-foot-equivalent units) and is built to accommodate the world's largest container ships. The total cost of the project is estimated to be around $1.6 billion.
"We expect the stock to do well in 2012 because of above average growth — due to expansion plans — and increasing cash generation potential," said Raghu Mandagolathur, senior vice-president for research at the Kuwait Financial Centre, also known as Markaz.
"Even though the global economy and world trade is expected to slow in 2012, DP World should relatively do better since 86 per cent of the company's consolidated throughput comes from faster growing emerging or frontier markets. The risks are sharp deceleration in global trade and shipping rates," he added.
Mandagolathur says global container volumes have historically grown at 3-4 times world gross domestic product (GDP) growth, adding that DP World is well positioned to benefit as the world's fourth largest ports operator with 60 terminals in more than 30 countries.
Revolving credit facility
DP World says it repaid a $3 billion revolving credit facility earlier this month ahead of its maturity in October, using existing cash resources. The firm will set up a new $1 billion five-year revolving credit facility, The payment of the existing loan reduces DP World's debt to about $4.7 billion, leaving it with a cash balance of about $1.2 billion, the company said.
"What can prevent DP World from reaching its price target is a slowdown in the world economy, which could entail lower shipping activity and subsequently lower port revenues for DP World," Darwiche said. "Earlier repayment of a $3 billion loan facility is explained with DP World's wish to secure a new five year loan of $1 billion in an uncertain macro-environment. The price target for DP World should be around $13.5 but any slowdown in the economy can act as an overhang on the stock," he added.
DP World handled more than 54.7 million TEU in its global portfolio in 2011, an increase of 10 per cent on the year before. It also said like-for-like volume growth was 9 per cent over the previous year. Growth in the port operator's home market was complemented by strong results from operations in the Asia Pacific, Africa and Americas, together with the addition of new capacity from terminals in Karachi and Vallarpadam, India — both of which opened in early 2011.
