SMSAAM. Initiation of coverage. Associated mid-risk. Recommendation and Investment Thesis. Target price: CLP 67 Recommendation: Hold Risk: Moderate

Transcription

1 SMSAAM Target price: CLP 67 Recommendation: Hold Risk: Moderate December 26, 2012 Sector: Transport Analyst: Pedro Letelier T: Company Information Ticker: SMSAAM CI Equity Closing price (CLP/stock): 58 9M Price range: 49,89 65,59 9M Daily volume (CLP million): 747 Stock # (million): Maket Cap (USD million): Stock / ADR: n/a Stock Performance YTD IPSA SMSAAM Initiation of coverage Recommendation and Investment Thesis We initiate coverage of SMSAAM by setting a target price for the year-end 2013 of CLP 67 per share. Our rating, based on the current price of CLP 58 per share, considers a potential 15.9% rise and a 1.7% return on dividends, totalizing a 17.6% return. Therefore, our recommendation is Hold with an associated moderate. Below you may find the main reasons which support our thesis: An annual GDP growth of around 4% is predicted for Latin America within the next five years, coupled with a significant investment plan in port infrastructure. The steady economic growth shown by Latin America in the last few years has benefited the development of international trade, which is carried out 75% through shipping. However, there is a significant deficit in port infrastructure, mainly due to the trend of the shipping industry to operate with larger ships. As a result from this latter situation, investments of about US$ are considered for the coming 3 years aimed at increasing the capacity of maritime terminals, thus creating excellent growth prospects for the port and logistics business. Business model based on sound synergies and a great geographic diversity of income. The operation of port terminals entails a high complementary level with the other business areas of SAAM (tugboats and logistics) which allows them to take advantage of synergies as well as offer a comprehensive service to both shippers, and exporters and importers. Today, the company operates in 59 ports and 12 countries worldwide. Long-term concessions enable both flows and margins stability. One of the main features of the port concessions model is that it is a well-regulated business with high entry barriers. This has allowed SAAM to operate with a stable EBITDA margin in its three business areas, thus enabling us to project a consolidated EBITDA margin of approximately 22% for the coming years of operation. Extensive leverage capacity allows them to finance their growth plan. SAAM manages a portfolio of potential investments of US$3,900 million for the next 3 years, mainly aimed at taking advantage of the new processes of port concessions which will be carried out in South America, Central America and The Caribbean. The recent separation from CSAV has allowed them to become independent in terms of leverage which was formerly limited due to the difficult financial situation CSAV was facing. Thus, SAAM shows leverages below the industry average, reaching a 1.4x net financial debt/ebitda and a 0.2x net financial debt/equity, which provides them with a wide room in case of funding requirement, added to the possibility of borrowing from partners and affiliate companies. Associated mid-risk The not renewal of some concessions entails a long-term risk. SAAM operates through concessions model within the ports and tugboats business. Concessions hold an average 20- year term and are subject to meet operational standards. International trade dependency. The risk derives from the difficult economic situation worldwide, with a backdrop of economic instability in Europe and some announcements of deceleration in Asia. Dependence on the shipping industry. There is still an imbalance of supply and demand within the shipping industry, worsen by a scenario of high volatility of oil prices which has led to an in-depth restructuration process, thus reducing scale of operation.

2 SMSAAM Target Price (CLP) 67 Recommendation: Hold Company Description - SMSAAM was created as a result of the division of CSAV, assigning the 70,737,318 shares that it owned in SAAM, representing 99.9% of the property. - With 50 years of history, SAAM is a leader in providing integrated services to shipping companies, operating through three business segments: Ports, Towage and Logistics. - The company currently has operations in the main ports of Latin America Profit & Loss Statement (USD thousand)* 2011* 2012e* 2013e* 2014e* 2015e* Operating Income Operating Expenses ( ) ( ) ( ) ( ) ( ) Operating Result Operating Margin % 13,5% 12,8% 13,2% 13,6% 13,7% EBITDA EBITDA Margin% 21,0% 20,8% 21,9% 22,8% 23,5% Net Financial Expenses (1.808) (2.562) (3.818) (5.819) (7.559) Non-Operating Result Net Income Controller s Share Net Income (Controller s) % 94,4% 94,8% 94,6% 94,6% 94,6% EPS (USD/share) n/a , , , ,58 Ownership (Sep-12) Balance Sheet (USD thousand)* 2011* 2012e* 2013e* 2014e* 2015e* pension fund 18,8% Float (Retail) 20,5% Other 23,3% Luksic group 37,4% Cash & Equivalents Other Current Assets PP&E Other Non-Current Assets Total Assets Financial Debt Total Liabilities Total Equity Minority Interest EBITDA breakdown(12m) consolidadas Cash Flow (USD thousand)* 2011* 2012e* 2013e* 2014e* 2015e* Operating Result Adjusted Taxes (11.500) (11.621) (13.205) (14.335) (15.215) Logistics Port terminals 23,6% 22,8% Depreciation & Amortization Capex (60.106) ( ) ( ) ( ) ( ) Working Capital (26.427) (4.319) (3.049) (3.229) Free Cash Flow (8.733) (1.300) (23.350) (17.226) (7.482) Towage 53,6% Equity Raised Dividends n/a n/a (16.883) (18.772) (19.589) Debt Issuance Peers P / U EV/EBITDA Ratios 2011* 2012e* 2013e* 2014e* 2015e* Wilson sons ltd 37,8 10,1 Stock Price (CLP) n/a Santos Brasil 26,4 7,8 P / E n/a 20,7 18,2 16,9 16,1 Agunsa 9,6 7,7 Liabilities / Equity 0,5 0,5 0,6 0,6 0,6 EV / EBITDA n/a 11,1 8,9 7,5 6,5 EBITDA / Financial Expenses 9,4 10,1 9,7 9,0 8,6 Net Financial Debt / EBITDA 1,4 1,2 1,5 1,7 1,8 ROA 6,7% 5,8% 5,9% 5,7% 5,5% β (vs IPSA): 0,8 ROE 8,5% 8,8% 8,7% 8,4% WACC PROM.: 7,9% Dividend Yield 1,5% 1,7% 1,8% Source: CorpResearch, Bloomberg, Company financial statements. * consolidated subsidiaries in financial statements SMSAAM Initial Coverage Pedro Letelier V. December 26,

3 Sound growth prospects for ports and logistics businesses based on the increase of containers transfer and port infrastructure requirements as well. - - % change growth GDP vs TEU World Source: world bank and IMF 2 - GDP - GDP Source: world bank and IMF 9,0% 8,0% 7,0% 6,0% 4,0% 3,0% 2,0% 1,0% TEU % change growth GDP vs TEU Latin America ,3% 3,2% TEU % growth Proyection GDP vsteu Latam 7,8% 8,1% 8,0% 8,0% 7,9% 3,9% 4,1% 4,0% 4,0% 4,0% 2012e 2013e 2014e 2015e 2016e 2017e GDP Source: IMF and Corpresearch TEU SAAM is a integrated services company within the maritime transport that operates into three business areas (Ports, Towage and Logistics) aimed at meeting the needs of shipping companies, exporters and importers, mainly through cargo containers. The world containers transfer has experienced a dramatic growth, mainly influenced by the advantages in the use of containers into the transport chain as well as the globalization of world economy. The use of containers has enabled the creation of a standardized maritime transport process, thus producing greater efficiencies throughout the whole cargo transport, including its storage distribution and control. The standard measurement unit used in the containers industry is the TEU (Twenty foot equivalent unit), which corresponds to a standardization of the containers measurement to measure the transported volume. The globalization process experienced by the world economy, characterized by the migration of production facilities towards those places where production is more cost efficient and the reduction of tariff barriers through free trade agreements have boosted the development of international trade, which is mostly (approximately 75%) through shipping. During the last decade, the world movement of containers, measured in TEUs, has reached a compound annual growth of 9.1% with an elasticity of about 2.5x growth rate of the world GDP. This situation is replicated in Latin America where containers movement has grown at a compound annual rate of 10.3% during the last 10 years, reaching a ratio of approximately 3.0x the GDP growth in the region. Based on the above and considering that SAAM s operations are mainly in Latin America, we are projecting a growth of around 8% in the containers transfer within Latin America, thus taking into account projections from International Monetary Fund for the region of an estimated annual GDP growth of about 4% for the next five years. Therefore, we make a conservative estimate for the next five years in the growth of containers transfer of 2.0x the GDP. Additionally, Latin America has a critical port infrastructure deficit, which has been evidenced through the new trends in the shipping industry, which, in the seeking of greater economies of scale has boosted the development of bigger-size ships. According to a report submitted by the infrastructure unit of ECLAC, as of the year 2016, ships with an average capacity of 13,000 TEUs will start arriving to the region. This widely exceeds the capacity of vessels that are currently sailing in the Latin American ports, which in average do not exceed 8,000 TEUs. This means that the majority of the port infrastructure shall be renewed in terms of docks depth, support and equipment areas so as to be able to load and unload the cargo, thus boosting numerous processes of port concessions. Therefore, considering the projected growth for the region and the investments aimed at providing a higher competitiveness to the port infrastructure, we visualize good growth prospects for port and logistic business areas of SAAM, which are directly related to the containers flow and concessions processes of port infrastructure. SMSAAM Initial Coverage Pedro Letelier V. December 26,

4 Diversified business model Geographical diversification SAAM is a widely diversified company, both geographically speaking and in terms of services delivered. It currently operates in 59 ports throughout 12 countries within Latin America, directly taking part of the operation of port terminals under concession (single operator), and besides, it provides towing services and logistics at multioperated terminals. The company was born from the Chilean shipping company CSAV, focalizing in its early years in the rendering of shipping services such as docking and undocking of ships with tugboats, loading and unloading of ships with cranes and the ship-agency business. In 1992, it started the internationalization process, coupled with the entry to the market of Peru, Colombia, Uruguay and Ecuador. However, the turning point in the development reached by SAAM took place together with the process of infrastructure concessions fostered by the government of Chile in the ninetieth, particularly, in the case of ports, the Law N 19,542 dated 1997, which dissolved EMPORCHI (Chilean Port Company), transferring the administration of all Chilean ports to 10 state-owned port companies, which would be responsible for carrying out the infrastructure concession process to private companies so that they can make significant investments aimed at modernizing the facilities. Thus, in 1999 SAAM was awarded the operation of two terminals jointly with SSA Marine; one is San Antonio (STI) and another is Talcahuano (SVTI), subsequently, it was awarded the operation of Iquique s Port ITI (Chile), Corral (Chile), Antofagasta ATI (Chile), Arica TPA (Chile), Panul (Chile) and then abroad with the ports Everglades FIT (Florida, USA), Guayaquil TPG (Ecuador) and Mazatlán (Mexico). Source: SAAM Reports. This way, SAAM consolidates its current structure which main advantage is the high degree of synergies among its business areas, since the operation of port terminals fully complements SAAM s other businesses such as the tugboat and logistic businesses. As we can see in the figure, SAAM becomes an integral logistic operator, covering almost all the cargo transfer process involved in the international trade, thus providing a full-range service to shipping companies as well as exporters and importers. Source: SAAM Reports. SMSAAM Initial Coverage Pedro Letelier V. December 26,

5 Stable operating margins SAAM ,3% 23,2% ,0% 21,0% 21,3% e 2013e 2014e EBITDA EBITDA Margin Port Terminals ,4% 24,4% 25,6% 25,9% ,9% e 2013e 2014e EBITDA EBITDA Margin Towage 29,3% 28,9% 29,5% ,4% 27,8% e 2013e 2014e EBITDA EBITDA Margin Logistics ,1% 13,7% 14,0% 15,3% ,0% e 2013e 2014e EBITDA EBITDA Margin Source: SAAM Reports and Corpresearch In operational terms and considering SAAM s consolidated subsidiaries, we have projected an EBITDA margin for SAAM of about 23% for the next 3 years of operation, based on projected growth for containers volume in Latin America (8% annual average), together with a projection of a stable operating margin of around 13%. Ports (Consolidated): SAAM is the main operator of port terminals in Chile with 6 concessions, plus 3 concessions abroad. On average, SAAM s port concessions grant a 19-year operation term plus 10-year extension subject to compliance of scheduled investments. Chilean port concessions start / end concession Extension option San Antonio Terminal Internacional 2000 / years Iquique Terminal Internacional 2000 / years San Vicente Terminal Internacional 2000 / 2029 Extended Puerto Panul San Antonio 2000 / Antofagasta Terminal Internacional 2003 / years Terminal Puerto Arica 2004 / 2033 Extended Foreign port concessions start / end concession Extension option Florida International Terminal, USA 2005 / years Terminal Portuario Guayaquil, Ecuador 2006 / 2046 Extended Treminal maritima Mazatlan, Mexico 2012 / years Fuente: Reportes SAAM y Corpresearch One of the main advantages of operating port terminals is that it allows you to have stable cash flows with sound returns since it is a well regulated business with highentry barriers. This allows us to make a projection of annual organic growth of income of about 8%, assuming flat tariffs, and an EBITDA margin of approximately 26% as a result from investments on equipment and infrastructure which have increased productivity of consolidated terminals of Iquique (dredged), Guayaquil (bought two RTG cranes) and Florida. Towage (consolidated): SAAM is the largest tugboats operator in Latin America with 126 tugboats and 8 been built. They have operations in Chile, Peru, Ecuador, Colombia, Brazil, Argentina, Uruguay, Guatemala, Honduras, Costa Rica and Mexico. For this business area, we have projected a 5% income growth with an EBITDA margin of about 29% for the next 3 years, boosted by the development of specialized off-shore tugboats business, focused on positioning and anchoring of oil and gas platforms. SAAM has currently operations in Mexico (PEMEX) and Brazil (Petrobras), being one of the businesses with greater development potential due to the existence of large mineral deposits off the coast of Brazil, Mexico, Colombia, Peru and Venezuela. Besides, the tugboat s utilization rate at this service in greater compared to the tugboat in a port, thus becoming more profitable. Logistics (consolidated): We estimate an annual organic income growth of about 5%, with an increase on EBITDA margin reaching ranges of 14% because of greater efficiencies derived from the business synergies and coupled to the incorporation of an inland port in Colombia. SMSAAM Initial Coverage Pedro Letelier V. December 26,

6 Extensive financial leverage capacity allows it to finance growth plan. SAAM manages a portfolio of potential investments of USD 3,900 million for to term ,7 1,5 1,4 1,2 1, e 2013e 2014e 2,0 1,5 1,0 0,5 0,0 Ports (USD 2,400 million). The shipping industry has experienced sound technologic changes so that new investments are mandatory to refurnish ports in order to cutting-edge vessels. Therefore, new processes of port concessions are expected, mainly in Brazil, Mexico, Central American and the Caribbean. Towage (USD 900 million). This is mainly focused on increasing SAAM s positioning into gas and oil off-shore market. Logistics (USD 600 million). Taking advantage of the know-how acquired in Chile to replicate it in those countries with high growth rates such as Colombia, Peru, Brazil and Mexico. CAPEX Souce: SAAM Reports and Corpresearch CSAV split & SMSAAM creation NFD/EBITDA None of these potential investments have been incorporated into projected flows; however, we bring them up in order to evidence one of the most significant advantages of SAAM which is its low leverage ratio which would allow them to rapidly react in case of funding resources to face new investment opportunities. It currently operates with leverage ratios below the industry average, reaching a 1.4x Net Financial Debt/EBITDA and a 0.2x Net Financial Debt/Equity, which leaves significant room in case of funding requirements, besides the possibility to resort to partners and subsidiaries. Additionally, the recent partition from CSAV has enabled SAAM to gain independency in terms of funding sources, as until 2011, it faced a severe constraint to borrow, derived from the complex financial situation its parent company CSAVwas going through, and which led them to liabilities amounting to USD 1,200 million during Souce: SAAM Reports Addressing this situation, on October 5 th, 2011, CSAV s board of directors agreed to separate SAAM, reason why SOCIEDAD MATRIZ SAAM S.A. ( SM SAAM ) was created and drawn up later on February 15 th, 2012, through the division of CSAV, under which SM SAAM was granted 70,737,318 shares that CSAV owned in SAAM, corresponding to % of the capital of the latter. Thereby, the only asset owns by SM SAAM are the shares that were granted from SAAM in the above mentioned division. Besides, SM SAAM was listed on Santiago s stock exchange, thus opening the spectrum of funding sources. Based on the aforementioned, we foresee an increase in the company s leverage ratio for the next 3 years, reaching rates of 2.0x Net Financial Debt/EBITDA aimed at meeting liquidity requirements necessary to face Capex needs which have been doubled from USD60 million to USD120 million annually during 2012-to-2014 period. Additionally, on its corporation s capacity of stock listed company, SM SAAM is required to distribute a 30% profit as minimum, if any, which yield a higher pressure over liquidity needs. Therefore, we expect the company begins to generate positive operating cash flows as of 2016, when EBITDA will completely cover working capital requirements and a regular Capex. SMSAAM Initial Coverage Pedro Letelier V. December 26,

7 Valuation WACC 7,9% Risk free rate Risk premium 5,5% Equity Beta 0,8 Debt / Assets 3 Equity discount rate 9,4% Debt discount rate 4,4% Source: Corpresearch Target Price SMSAAM Equity SAAM (CLP thousand) Equity unconsolidated subsidiaries* Total equity SMSAAM (CLP thousand) Stock # SMSAAM (thousand) Target Price SMSAAM (CLP) 67 * STI, SVTI and ATI Source: Corpresearch In order to estimate the target price of SMSAAM, we use a discounted cash flow model (DCF), where it separately figures EBITDA of SAAM, main asset of SMSAAM. However, it is pertinent to point out that SAAM does not consolidate into its financial statements, a significant number of affiliate companies, so that we have separately figure the EBITDA of those companies with greater growth projections such as San Antonio International Terminal (STI), San Vicente International Terminal (SVTI) and Antofagasta International Terminal (ATI) to determine the value they contribute to SMSAAM s price weighted by shareholding percentage. From this estimate, we figure free cash flows until 2023, discounting these flows at 7.9 WACC with a β of 0.8. Besides, we apply a 5.0% long-term growth rate, which comprises 1.5% associated to those no-consolidated and not independently rated affiliate companies. Therefore, we set a target price of CLP 67 for the year-end 2013, which represents a potential 15.9% increase over the current price at the stock exchange. Accordingly, our recommendation is hold with an associated mid- risk. Next, projections on EBITDA of not-consolidated affiliate companies San Antonio International Terminal (STI), San Vicente International Terminal (SVTI) and Antofagasta International Terminal (ATI) are shown. STI 2012e 2013e 2014e 2015e Income EBITDA EBITDA Margin 3 35,5% 31,5% 31,5% Source: Corpresearch SVTI 2012e 2013e 2014e 2015e Income EBITDA EBITDA Margin 26,7% 26,7% 26,7% 26,5% Source: Corpresearch ATI 2012e 2013e 2014e 2015e Income EBITDA EBITDA Margin 32,0% 31,9% 37,6% 37,6% Source: Corpresearch SMSAAM Initial Coverage Pedro Letelier V. December 26,

8 Glossary Term Definition / Translation Calculation EBITDA EBITDAR Earnings Before Interests, Taxes, Depreciation and Amortization Earnings Before Interests, Taxes, Depreciation, Amortization and Rents Operational Income plus Depreciation and Amortization Operational Income plus Depreciation and Amortization plus rent of fixed assets. It is used the at transport industries to reverse the rent of airplanes or ships. EV Enterprise Value Market capitalization plus Net Financial Debt plus Minority Interest EV/EBITDA Valuation multiple. While greater it is, more expensive it is the stock EV divided by Ebitda FCF Free Cash Flow Operational Income plus Depreciation and Amortization minus tax minus capital expenditures plus (minus) working capital variation. Free-float Margin Operational Ebitda Net Percentage of stocks that can be freely traded in the market Percentage of sales Percentage of stock that does not belong to controller s shareholders. Operational Income / Revenue Ebitda / Revenue Net Income / Revenue P/E Price / Earnings Market Price divided by EPS P/B Price to Book value ratio Market price divided by the accounting value of the stock. Dividend Yield The return in terms of dividends of investing in equities FCF yield Free Cash Flow Return. FCF / Market Price Dividends distributed in a year divided by the market price. ROA Return on Assets Net Income / Total Assets ROE Return on Equity Net Income / Accounting capitalization EPS Earnings Per Share Net Income / Shares outstanding YtD Year to Date Percentage variation year to date x Times Stocks recommendations are established according to the stock yield relative to the IPSA Index. We recommend Hold when we expect the share to have a yield in line with the IPSA; Buy, when the yield expected for the share is above to that expected for the IPSA; and Sell, when the yield expected for the share is below to that expected for the IPSA. We define a yield to be In line with the IPSA when it is within a range whose scope is equivalent to a third of the variation expected for the index, with a 5% minimum. SMSAAM Initial Coverage Pedro Letelier V. December 26,

9 CorpResearch Álvaro Donoso Director CorpResearch Economic Research Sebastián Cerda Executive Director CorpResearch & Economic Studies Nicolás Birkner Senior Economic Analyst Natalie Charles Investment Analyst Juan Ortiz Economic Analyst Equities Research Cristobal Lyon Director of Strategies Vicente Meschi Senior Analyst. Sectors: Banking, Forestry Sergio Zapata Senior Analyst. Sector: Energy Pedro Letelier Analyst. Sectors: Transport, Telecommunications and Food & Beverages Josefina Guell Analyst. Sector: Retail Patricio Acuña Analyst. Rosario Norte 660, 17 th floor, Las Condes, Santiago. T: SMSAAM Initial Coverage Pedro Letelier V. December 26,

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