DP World readies for expansion

DP World is drawing closer to reviving its global investment plans after increasing its cash pile to almost US$3 billion (Dh11.01bn).

• After pushing down costs judiciously during the downturn, including trimming its global workforce by 5 per cent, the world’s fourth-largest ports operator is in a prime position to invest in new terminals where it sees the greatest untapped demand.

  “We have the ability to time it once we see the markets come back,” says Yuvraj Narayan, the chief financial officer of DP World. “Our plan was to complete most of these by 2013. I think what you will see is two years market respite.”

• During the boom years of 2004 to 2008, the company reached agreements to build a dozen new terminal projects, from Fos in France to Qingdao in China.

  The growth plans called for DP World to double its container-handling capacity across its worldwide network to more than 90 million “twenty-foot equivalent units” containers (TEUs) per year by 2018.

  But as the downturn temporarily slowed China’s factories and stalled global trade, the company was forced to place all projects under review.

• Now, it may tuck into its cash pile as it walks the fine line between conserving funds during the crisis and preparing to catch pockets of growth when the global economy recovers.

  A drop in port utilisation globally as the downturn caused global trade to decline forced ships to be laid up instead of carrying cargoes across the oceans. That drop freed up capacity and delayed the need to invest in new infrastructure.

• DP World terminals were 74 per cent full throughout last year, down from its 88 per cent utilisation rate in 2008, the company says. “We’ve got a breather,” Mr Narayan says. “We don’t need to push expansions.”

  Nonetheless, the company has continued to build its network, selectively choosing terminal projects that promised immediate rewards, even during the global slowdown.

  It reported capital expenditures of $1.1bn last year as it opened terminals in Ho Chi Minh City in Vietnam and Djibouti in Africa. In addition, DP World completed Terminal 2 in Jebel Ali, while renewing Australian concessions in Adelaide for 30 years and Sydney for 15.

• This was on top of several investments in 2008, including acquiring a terminal in Tarragona, Spain, adding new concessions in Aden, Yemen, and two ports in Algeria – Algiers and Djen Djen – and extending its concession in Brisbane for 40 years.

  This year, the company is planning another $800 million in capital expenditure as it adds two new ports to its portfolio: at Callao, Peru; and Vallarpadam, India. Vallarpadam is billed as India’s “gateway port” and transshipment hub and should open in June. DP World has also begun preliminary dredging at the London Gateway project on the River Thames, which is being heralded as the first major port project in the UK in 25 years.

• For next year, it has outlined at least one terminal expansion: Karachi in Pakistan, due to open in the first quarter.

  With one eye on these long-term projects, DP World also managed to cut its expenses. Last year it trimmed its fixed costs by 7 per cent, ahead of target, with a range of measures that included 1,500 redundancies, many at its port in Southampton, England, and at its headquarters in Dubai.

• As a result, the company’s cash reserves grew to $2.9bn, according to its financial results released last month.

  “DP World has been very decisive and successful in scaling its investments down in crises,” says Philipp Lotter, a senior vice president at Moody’s.

  “They did the right thing by focusing on cash retention.”

  The company is a unit of Dubai World, the government-owned holding company that is restructuring $24.8bn of debt with its creditors. Throughout the four months of restructuring talks, DP World and its assets were “ring-fenced” and protected from creditors of the parent company.

• As a result of this and its investment plan, its has flourished during one of the most challenging periods for the Dubai economy, Mr Lotter says.

  “They de-risked the business by focusing on bolt-on small expansion projects rather than big greenfield projects. That was the right thing to do in the crisis, and the reason why DP World is actually well equipped financially to weather the wider Dubai-related liquidity crisis.”

• While the company has total debts of $8bn, none of this looms large on the horizon. Much of it is tied up in long-term debt with maturities in 2017 and 2037.

  “DP World is in a very strong position,” Mr Lotter says. “They have no funding requirement, in our view, for a good 24 months.”

• This will allow it to use its cash to invest in new equipment at its terminals, he adds. “I would not be surprised if we saw a cautious selective set-up in investment going forward, which very much reflects the situation they are in.
• “It’s a very long-term market. These are projects you don’t just enter into and slip out of when things go against you. It takes a long-term commitment.”