DP World will partner with a Canadian pension fund in a US$3.7bn investment vehicle that primarily looks at brownfield projects in investment-graded countries. The terminal operator will retain operational control of the fund with 55% stake, after seeding it with two west coast Canadian terminals (Prince Rupert and Vancouver). The pension fund Caisse de depot et placement du Quebec (CDPQ) will plough US$640m for the remaining 45% stake. Hence, the total start-up capital for the investment vehicle is CAD1,900m (or USD 1,420m).
DMER view:
We have earlier commented on DP World's leverage that will not be able to support its ambition – 100m gross teu capacity target by 2020. The company could bolster its balance sheet by expanding capital base and/or paring stakes in some terminals. For the latter option, we looked at the possibility of monetising DPW's Indian Subcontinent concession. It has not materialised, but the pedigree of the latest deal stokes speculation. The latest transaction is in line with our thesis of balancing ambition and financial constraints.
1) There is a notable gap in the mandates of the partners. DPW has greater risk appetite compared to CDPQ. Evidently, the investment vehicle's mandate plays in favour of whoever funds it. DPW has a budget of USD 925m (25% of USD 3.7bn) for emerging markets. When the USD 3.7bn is fully deployed, DPW's portfolio structure would change to 65% exposure to emerging markets, and 35% exposure to developed markets. Depending on the investments to be made, there will be impact on valuation as the long-term growth expectation changes.
Fig: DPW portfolio structure prior to the deal
2) DPW struck a sweet deal with CDPQ in our view and is likely to have profited from divestment.
– The 3rd largest global terminal operator acquired Fairview Container Terminal, Prince Rupert, in April 2015 for CAD 580, and has spent CAD108m on the terminal as of 1H 2016. DPW will spend another CAD142m to expand the terminal's capacity. Concession ends in 2056.
– P&O ports signed an agreement valued at CAD103m with Vancouver Port Authority to operate Centerm Container Terminal from 2003-2054. Following a company-wide acquisition of P&O ports in 2005 at a premium of nearly 50%, DP World had invested another CAD130m into the terminal. We adjust for P&O holding company discount of 20% that was reflected in the acquisition price. Total investment for DPW Vancouver is about CAD 323m.
– Total investment for both terminals are CAD1,153m. As the investment vehicle values the two terminals at CAD1,900m, DPW receives a price premium of CAD 747m, translating to a cash gain of CAD 336m (or USD 254m) on investments.
3) As the investment vehicle provides up to USD3.7bn of joint investment, and that USD1.4bn has been used, there is scope to drop more assets into the vehicle for cash.
The latest announcement bodes well for DPW, with share price gaining 5.3% in the last three trading days. We maintain Attractive valuation on a DCF-derived fair value of USD 21.70.
Source: Drewry Maritime Equity Research