Shippers may disagree over the perception that shipping lines are taking advantage, but container ports remain more profitable and attractive to long-term investors, according to a new report.
Ocean Shipping Consultants’ (OSC) Port Sector Outlook 2021 report paints a rosy picture for terminal operators as volumes and profits remain stable despite the volatility of the Covid crisis.
“Shipping lines draw a lot of media interest as high-profile consolidations and vessel size developments dazzle casual observers,” OSC notes. “But the financial performance of the ports is superior to that of the shipping lines.
“Taking DP World’s delisting as an anecdote, management decided there was no point in listing when market participants do not appreciate its business and strategy.”
Comparing Hamburg terminal operator HHLA with compatriot shipping line Hapag-Lloyd, for example, OSC said the latter had gained a third of its market capitalization in the past 12 months, while HHLA lost 20% in the same period. This is despite the fact that the terminal operator has had consistently higher ebitda over the past half-decade.
“Although shipping lines increased their profitability in 2020, their profits are more volatile than those of the port sector. Therefore, for long-term investors such as pension funds, the port sector fits the stable dividend/income yield investment mandate,” added OSC.
Perhaps to allay earlier fears that new port investment will slow, container ports are also leveraging their balance sheets for further expansion, which OSC described as a “sound strategy.”
For example, it said, “high-profile port operators have tapped the debt and private equity markets” for portfolio expansion, with $6.6 billion raised last year.
“Out-of-pocket investors secured 13 container port deals, only one less than the total in 2019,” OSC noted, adding that all deals announced in 2019 came through, indicating that investors saw Covid-19 as a temporary crisis.
Bidding processes also continued with concession awards in the “attractive” geographies of Africa, South Asia and Southeast Asia, according to the report, where regional box volume growth is expected to be above the global average of 3.5% per year through 2050.
OSC also noted the emerging trend of vertical integration among container terminal operators, especially DP World, which has been busy entering the feeder business and onshore logistics operations.
OSC said vertical integration would reduce the volatility of port volumes, but cautioned, “The combination of different revenue streams and margins could reduce the profit margin of port operators in the short term.”
On the other hand, vertical targets can strengthen a terminal operator’s presence in a region by offering an integrated service to end customers, it added.
On the other hand, the consultancy noted that last year’s performance of transshipment hubs was relatively low, which is a general cause for optimism for the port sector.
“Transshipment hubs are representative of trade volumes in a particular region. Flat growth in transshipment hub volume should feel like a jackpot for port operators in a pandemic, and one can be confident of a strong increase in trade volume when the Covid-19 situation improves,” said OSC.