x Abu Dhabi, UAESunday 23 July 2017

Regional adversity enables DP World to boost business

It has been a pretty good 'Arab spring'' so far for DP World, the global ports operator based in Dubai, writes Frank Kane.

DP World handled more containers in its Jebel Ali operation than ever before in the second quarter. Rabih Moghrabi / AFP
DP World handled more containers in its Jebel Ali operation than ever before in the second quarter. Rabih Moghrabi / AFP

It has been a pretty good "Arab Spring" so far for DP World, the global ports operator based in Dubai.

Last week's trading figures confirmed what the optimists have been saying since disturbances broke out in Tunisia in January: that adversity in other regions of the Gulf and wider Middle East would be an opportunity for DP World to take in business at Jebel Ali, the UAE's premier port.

So it has proved. Terminals in Egypt, Saudi Arabia and Yemen have experienced a decline in business, but Jebel Ali is up, handling more containers than ever before in the second quarter.

Though DP World executives would not talk about it specifically, it is likely at least some business came the way of Jebel Ali from trouble-hit Bahrain, its main rival on the lower Gulf.

The fortunate accident of not having any terminals in tsunami-hit Japan was also a boost, in contrast to rival global hubs such as Singapore, which suffered in the second half as the supply of materials from Japan slowed significantly.

Those are the macroeconomic factors that determine business at DP World: big swings in global patterns of commerce, at the caprice of socio-political events and natural phenomenon.

It must make it pretty hard to predict future trading at the company. All DP World executives can do is get the rest of the business in as good a shape as possible, and hope for a fair wind from global markets.

In fact over the past few years in Dubai, "getting in good shape" has not been as simple as it sounds. It has involved a number of separate strategic decisions on the future of the company, which, if got wrong, could have landed DP World with the same kind of problems that have inflicted other parts of Dubai Inc, not least its parent Dubai World.

The first was the market flotation in 2007. Though, with hindsight, this was badly timed - just as the signs of the financial crisis were gathering - and badly priced - the shares have never hit the equivalent $26 (Dh95.49) float price since - it had one big benefit.

Partly because of the presence of outside investors, DP World was ring-fenced from the restructuring of Dubai World in 2009, and the pain that involved.

The second sound strategic move was to align DP World's long-term bank and bond borrowing with the group's cash-generating capability. According to Bloomberg data, DP World has some $10 billion of debt outstanding, with $3bn repayable next year.

But, bolstered by the sale of its Australian business earlier this year, it also has something approaching $5bn of cash in the bank.

The crucial ratio for debt holders and ratings agencies is the cash-flow-to-debt figure, and this is moving in the right direction. It allowed it to get approval for new bond issuance at pretty good terms recently.

The raters are responding to DP World's increasingly sound financial health, with both Moody's and S&P making positive noises about upgrades and outlook recently.

The third element of the DP World financial strategy was the listing of its shares on the London Stock Exchange (LSE) last June.

This move had been the subject of some quite intense internal debate within the company, and at first look the doubters seemed to have had their fears confirmed: the equity lost some 10 per cent of its value after the London listing, with no great interest shown by London investors in the stock (although perversely volumes in Dubai have improved significantly).

There was quite a significant uptick after the trading figures, encouraged also by easing of global economic fears after US and European debt scares. The LSE move was always going to be a long-term play for a company heavily influenced by global economic factors.

But now another strategic decision is looming. With all looking good on the commercial and financial fronts, Dubai World, the 80 per cent shareholder, is considering whether to sell down a further chunk of shares in the near future.

The debate is along the same lines as in the past: between those who believe in the principle of global equity ownership, and those who want Dubai to keep its assets intact in the safe.

The reservations of the doubters would be assuaged if there were the prospect of a significant rise in the value of the shares.

One idea being discussed in investment banking circles would see Abu Dhabi come in as a core investor for, perhaps, a 10 per cent stake, at a price to be determined but probably north of where it is today at about $12.45.

Of course, this could just be the normal grand strategic thinking of the investment bank advisers, eager to drum up business.

But sometimes, just sometimes, they get it right too.