The Drewry Port Equity Index (DPEI) has recorded major fluctuations over the past few years, driven by a complex interplay of economic/ industry factors, including Covid-led supply chain disruptions and evolving geopolitical risks. Between 2020 and YTD 2024, the DPEI underperformed the S&P 500, with the sectorial index posting a gain of 63.8% compared to the S&P 500’s cumulative surge of 74.8%, reports Drewry.
Navigating the rough waters
After peak Covid-led restrictions in 2020, the DPEI outperformed the broader S&P 500 index in 2021 and 2022. This gain was driven by higher demand and increased revenues from Value Added Services (VAS) such as storage and refrigerated cargo fees. However, there was a notable difference in this uptick during those two years.
In 2021, the gains were well spread out across the index constituents. The ports and terminal industry benefitted from the strong pent-up demand, coupled with limited availability of labor and varying levels of COVID-led disruptions, resulting in massive supply-chain congestion globally. The situation led to higher contributions from VAS services, favoring Global Terminal Operators (GTOs) and Regional Terminal Operators (RTOs). Consequently, GTOs and RTOs recorded a double-digit valuation gain in 2021, but GTOs outpaced RTOs because of their larger scale of operations, leading to a 47.6% increase in GTO share price valuations vs a 26.5% rise for RTOs.
In 2022, the industry dynamics got more complex as the degree of restrictions varied widely across regions. Investors attached different growth expectations based on the geographies where the company was operating, causing the valuation gap to widen between GTOs and RTOs. Under such a scenario, GTOs’ larger scale of operations continued to work in their favor as restrictions remained intact in some areas but eased in others.
However, RTOs were more exposed to the COVID policies of their specific operating countries. For example, Brazil, which adopted a relatively relaxed approach led to a strong rebound in Santos Brasil’s stock price after dropping 50.1% in 2020. The stock surged 18.9% in 2021 and 38.8% in 2022. In contrast, Liaoning Ports, a China-based RTO, that kept facing sporadic government restrictions, recorded three consecutive years of valuation losses. The stock price declined 23.3% in 2020, 4.6% in 2021 and 4.4% in 2022.
As the supply chain started to normalize in 2023, the increased contribution from VAS started to level off. Additionally, investors rebalanced their portfolios (in favor of technology stocks), reflecting the post-Covid realities (demand shifting from products to services). Both these points led to the reversal of the relatively high performance of the Drewry Port Equity Index compared to the S&P 500. During the year, the sectorial index significantly underperformed the broader market by 19.1 percentage points (p.p) vs 32.3 p.p and 10.6 p.p outperformance recorded in 2021 and 2022, respectively.
Meanwhile, the situation again changed in 2024 as receding inflation and a growing global economy fuelled consumer demand, as evidenced by the industry-wide throughput growth of 6.1% YoY in 1H24. Additionally, heightened geopolitical risks and the closure of the Suez Canal forced liners to take the longer routes (via the Cape of Good Hope) to connect Asian economies (the world’s production center) with American and European markets (the world’s largest consumer markets).
These stretched routes caused vessels to drop more containers at selected hubs, leading to congestion at these ports, which gradually spread to other ports, resulting in the resurgence of higher VAS revenue for many players. The argument finds support in the recently published 2Q24 results, wherein companies like APMT, ICTSI, HHLA, Westports, and Santos reported higher revenues from ancillary services as a reason for the jump in their YoY topline growth. For YTD (ending 31 August 2024), the Drewry Port Equity Index is up 9.6% (vs 2023: 5.1%) but still lags behind the S&P surge of 18.4%. With two months into the current quarter, we expect VAS contribution to remain high in 3Q24 results, as global trade uncertainties remain largely unchanged.
With robust demand, a favorable operating environment, a recent run-up in stock prices, and an above-average industry multiple, investors are unsure whether to buy or book profits. This uncertainty arises from the industry’s lack of strong new catalysts. At the current valuation, it appears that investors have already priced in key positive factors such as robust demand and the lowering of interest rates by the US Federal Reserve. Meanwhile, challenges such as geopolitical tensions and fairly priced market valuations continue to weigh on the investors’ sentiment. Despite fair valuation, we believe there are opportunities in individual pockets of the market, so one should analyze the individual companies to identify the winner, instead of riding on the sectorial trend.
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Source: Drewry
