Investor confidence took a hit due to persistent high prices and rising interest rates. In the third quarter of 2023, the S&P Index dropped by 3.6%, reflecting widespread concerns in the global market. Similarly, the Drewry Port Equity Index, which measures the performance of the ports and terminals sector, also fell by 3.1%. A closer look at the index revealed that both Global Terminal Operators (GTO) and Regional Terminal Operators (RTO) experienced average valuation declines of 3.2% and 2.8% respectively.
Major Chinese companies like COSCO Shipping, CMPorts, Liaoning, and Tianjin saw year-to-date declines, indicating cautious investor behavior due to China’s economic issues and the growing differences between the US and China.
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While 3Q23 earnings are yet to be released, the results from the second quarter indicate a notable change in the industry. After two consecutive quarters of decline, revenues stabilized. Additionally, operating expenses decreased, mainly due to lower fuel and energy costs. These factors led to a significant reduction in port earnings, which had been decreasing for the past two quarters.
HHLA stood out as the top performer, with a valuation gain of 43.4% in 3Q23 and 38.1% year-to-date (ending on October 4, 2023). This increase was a result of an unexpected development: 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. Following this announcement, HHLA’s stock price surged by 49% in just one day, reaching EUR 17.20 (above MSC’s bid of EUR 16.75). This move also raised the company’s EV/EBITDA ratio to 5.3x, compared to 4.6x just before the announcement.
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Despite these developments, the sector continues to trade in the undervalued zone, with an EV/EBITDA multiple of 9.2x, significantly lower than the industry’s 10-year average of 10.7x.
Although the US Federal Reserve has paused rate hikes, the European Central Bank (ECB) increased rates by 25 basis points. The cautious stance of both these banks has made global investors nervous. Given the already high interest rates, potential for significant gains in the mid-to-long-term appears limited. However, considering the sluggish demand outlook, investors are advised to be patient and seek specific opportunities instead of investing broadly in the sector.
