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Drewry: Port Equity Index Remains Muted

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After posting a robust increase of 19.8% in 4Q22, the Drewry Port Equity Index’s performance remained muted YTD (ending 30 May 2023) with a valuation loss of 2.1%. Increased fear of recession, higher inflation and heightened interest rates took a toll on investor sentiment. On the flip side, the broader S&P 500 significantly outperformed the port index by 11.6 percentage points. Looking closely, stocks of Regional Terminal Operators (RTO) outperformed Global Terminal Operators (GTO) with a YTD gain of 1.3% and a YTD loss of 4.1% respectively.

In 1Q23, volumes continued to decline amid a worsening global trade scenario. Among the constituents of the Drewry Port Equity Index, Hamburger Hafen und Logistik Aktiengesellschaft (HHLA), Santos Brasil Participações S.A. (Santos Brasil), China Merchants Port Holdings (CMPorts), and COSCO SHIPPING Ports (COSCO Ports) reported YoY declines in container throughput of 18.6%, 14.3%, 4.6% and 4.0%, respectively. Even though container volumes of International Container Terminal Services, Inc (ICTSI) increased 9.5% (YoY) in 1Q23, its like-forlike volume slumped 0.7% (YoY). Westports Holdings Berhad (Westports) was the only company witnessing container throughput growth of 6.7% (YoY) mainly led by a positive contribution from the transhipment and gateway volumes.

Lower container volume, along with easing port congestion (which continues to pressure storage income) that led to a dip in revenues of companies across the sector in 1Q23. The pain was further aggravated by the increasing manpower cost, which to an extent was offset by the lowering fuel charges, cumulatively resulting in margin compression for most industry participants – for instance, APM terminals (1Q23: 33.2% vs 1Q22: 40.3%), HHLA (1Q23: 17.1% vs 1Q22: 23.9%), ICTSI (1Q23: 61.9% vs 1Q22: 64.0%) and Santos Brasil (1Q23: 44.7 vs 1Q22: 50.0%).

Higher inflation and restrictive monetary policy have kept interest rates high, disincentivising companies from raising additional money through fresh bond issuances, which was the preferred mode during 2020-21. Moving forward, interest rates are expected to remain elevated throughout 2023, hinting at muted debt activity for the remaining months of the year.

A substantial drop in profitability pushed the LTM EBITDA figures down, whereas the industry’s equity valuation remained somewhat stable. This pulled the valuation multiple (EV/EBITDA) higher on a sequential basis. Despite this increase, the industry valuation remained in an undervalued zone when compared with its long-term average. Furthermore, the current valuation seems vulnerable to the ongoing debt ceiling debate in the US, restrictive monetary policy, persistently high inflation and the ongoing Russia-Ukraine war in the short-to-medium term.

Source: Drewry Maritime Financial Research

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