EUR 40.96 For Business Accounts Only

Container handling investments main anchor of value; Initiate with Overweight

Appealing valuation. We initiate coverage on Canal Shipping (CSAG) with a TP of EGP18.0/share, mainly derived from its container handling investments, as we value core operations (i.e. custom clearance, warehousing), which almost break even, at nil. CSAG owns 20% stake in Damietta Containers (DCHC) and Port Said Containers (PSCH), strategically located at Suez Canal’s Mediterranean entrance, handling a combined c27% of TEUs in Egyptian ports in 2018. Our DCF for both port operators implies an average FY20e P/E of 6.8x (-30% vs. ALCN’s trading multiple), 61% below peers, mainly to account for lack of tradability. CSAG records net cash of EGP687mn, as of Mar-19 (36% of market cap), and is expected to post FY20e RoE of 34%.

Suez Canal traffic tonnage is key. The sea-level Suez Canal, with a water depth of 24m, remains the route of choice for liners operating ULCVs with a capacity range of 15k-22k TEU, vitalising berth deepening at Suez Canal ports. We expect the Suez Canal Authority (SCA) to extend current toll cuts (discount range of 45-65%), to stimulate traffic growth, which recorded 983mn tonnes in 2018 (+8% y-o-y), depending on shipping routes and distances. This, along with the IMO’s 2020 regulations, which are expected to hike fuel cost, benefitting short sea routes, should foster Suez Canal's traffic.   

Low pricing favourable for Suez Canal ports, amid intensifying competition. We like CSAG’s investments in DCHC and PSCH, as tariffs are charged in USD, while costs (mainly labour) are EGP-denominated. Both operators charge low tariffs, with DCHC recording revenue of USD71/TEU in FY18 (-61% vs. ALCN) vs. PSCH USD128/TEU (-29% vs. ALCN). However, we expect DCHC and PSCH to record a negative FY19-24 CAGR of 3% and 5% in revenue/TEU, respectively, on intense port competition. We assume terminal operating rates of 70% and 80% for PSCH and DCHC, respectively, to factor heightened global trade tensions. This poses upside, should trade conflict uncloud. Each incremental 5% depreciation p.a. in EGP hikes our TP by 11%, all else constant. 

DCHC and PSCH potential listing, DPS, short-term catalysts. DCHC and PSCH are part of the second round of the privatisation programme (seen in 1Q20), expected to improve disclosure and unlock value. We note that Alex Containers (ALCN) [Overweight | TP EGP20.9] is currently in the process of its 20% secondary offering. Additionally, CSAG is a decent dividend payer, backed by a cash position of EGP687mn and tax exemption (free zone), with a FY19e yield of 8.2% (DPO of 70%), well above peers’ 3.5%.