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Ports & Terminals : Investor sentiment down

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LONDON : Sticky inflation and elevated interest rates had a detrimental impact on investor sentiment. In 3Q23, the S&P Index declined 3.6%, mirroring the broader concerns in the global market. Similarly, the Drewry Port Equity Index, which gauges the performance of the Ports and terminals sector, also recorded a 3.1% drop. A closer look at the index’s subcategory reveals that Global Terminal Operators (GTO) and Regional Terminal Operators (RTO) registered an average valuation decline of 3.2% and 2.8%, respectively.

The major Chinese companies, such as COSCO Shipping, CMPorts, Liaoning, and Tianjin, recorded YTD declines. This indicates investors’ cautious approach due to China’s macroeconomic issues and the growing divergence between the US and China.

As the 3Q23 earnings will be out soon, 2Q23 results indicate a notable shift in the industry. After declining for two consecutive quarters, revenues have stabilised. Meanwhile, operating expenses have fallen, largely as a result of lower fuel and energy costs.

Collectively, this sharply pulled back the port’s earnings, which have been declining over the past two quarters.

HHLA remained the top performer with a valuation gain of 43.4% in 3Q23 and 38.1% YTD (ending on 4 October 2023), benefitting from an unexpected development wherein Mediterranean Shipping Company S.A. (MSC) announced its plan to purchase all publicly traded A shares of HHLA at a price of EUR 16.75 per share, offering a substantial premium of 57% over the 30-day volume-weighted average price. After the announcement, HHLA’s stock price surged by 49% in just one day, reaching EUR 17.20 (above the MSC’s bid of EUR 16.75). This has also elevated the company’s EV/EBITDA ratio to 5.3x, vs 4.6x calculated just before the announcement.

The sector continues to trade in the undervalued zone with EV/EBITDA multiple of 9.2x, significantly lower than the industry’s 10-year average of 10.7x.

Although the US Fed has halted the rake hikes, the ECB has increased it by 25 bps. However, the hawkish stance of both these banks has given jitters to global investors. Considering that interest rates are already high, we believe that upside risk is limited from the mid-to-long-term perspective. However, with the sluggish demand outlook, investors should remain patient and search for pockets of opportunities instead of investing in the sectorial theme.

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