Threats. Cyclical nature of consumer demand. Public sector delay in port upgrading. Market capitalisation: Rs 1.7bn Benefit from planned port upgrades

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1 Executive Summary Overview The (MFD) is a provider of vertically integrated supply chain and logistics services. The company s history began in August 1995 when it signed an agreement with the Government of Mauritius to develop an area of five hectares (25ha) within the Freeport under a 60-Year Build-Operate-Transfer (BOT) contract. Performance: Review & Prospects MFD generates revenue from dry/cold warehousing, its container park, and supply-chain logistics. Turnover has grown at an annualised rate of 13.7%, since 2004, to Rs696M (+14% YoY) in FY14. In spite of steady Revenue and EBITDA growth, MFD has either broken-even or registered losses up to 2012 due to increasing depreciation and finance costs driven by on-going development of infrastructure in Freeport Zone 5. Now that development is completed, debt levels will drop and depreciation hover at 4%. Thus, EPS growth is expected to outpace that of EBITDA in coming years. Re-current PAT which doubled to Rs83M in 2014 is projected almost double to Rs174M in Given the company s limited lifespan under the Build-Operate-Transfer model, MFD has been reorganised into a holding structure so to make room for creation of future vehicles for growth. MFD is expected to expand its business in areas other than those allowed by its restrictive Freeport licence; for instance providing in-land logistics supply-chain services. Regional expansion, albeit at an exploratory phase, is also being investigated. Indices = 100 on 25-Mar-14 Rating MFD 47.8% ACCUMULATE PER DY PBV FP 22.19x 1.13% 1.69x 0.0% MFD ALEX-20 TRI Valuation: Introduced as TBD Assuming MFD continues to grow in tandem with the Freeport sector and the broader economy, we forecast MFD s PER to stand at 15x in 2015 then drop to 10x in 2016; which stands below the ALEX-20 PER (16.4x) and Total Market PER (14.7x). Its Price:Earnings Growth (PEG) Ratio which have been negative in recent years, is poised to drop 0.67x in 2015 then 0.50x in Given that MFD is expected to pay-off its borrowings within a decade, its current Debt:Equity Ratio (DER) falls from 127% to 102% in 2015; i.e. Debt/Share will decrease from its current Rs8.70 to Rs7.85 in We valued the company using a steadily increasing pay-out ratio which reaches 70% within a decade. Our consensus valuation using a linear combination of Ratios, Net Assets and Free Cash Flow methods stands at Rs12.24 per share. Although the company appears to trading close [6% discount] to fair value, due to the company s realistic potential for even higher pay-out ratios, we introduce an ACCUMULATE rating for MFD. Low Rs 7.78 Rs CDS Code: ISIN Code: Bloomberg Code: Reuters Code: 52-Wk Range VWAP High MFDG.I0000 MU0471I00006 MFDG MP MFDG.MZ Trading data Opportunities Threats 26-Mar-15 Optimising existing facilities Cyclical nature of consumer demand No of Shares: 150M Expand services outside Freeport Public sector delay in port upgrading Market capitalisation: Rs 1.7bn Benefit from planned port upgrades Finite lifespan of current operations Weight on SEM: Weight in ALEX-20: 0.6% Highlights E 2015F 2016F Weight in ALCAPEX-12: Revenue [RsM] Ave. daily value traded: Rs 95.7k EBITDA [RsM] Ave. daily vol. traded: 8,600 PAT [RsM] YoY Total Return: 47.8% Adj EPS [Rs] All time high: Rs 19.4 NAV [Rs] (08-Nov-06) Debt/Share [Rs] DPS [Rs] Key P&L Trends Valuations E 2015F EBITDA Marg. [%] Gross Marg. [%] PER [x] 12, PEG [x] 2, PBV [x] EV/EBITDA [x] ROE [%] DY [%] DER [%] F E 2015F 2016F Revenue [Rs] Adj EPS [Rs] 39 EBITDA Marg [%] 1

2 FINANCIAL PERFORMANCE I. Revenue The Freeport in Mauritius was established in the mid-90s as a dutyfree logistics, warehousing, and distribution hub for the region. Following a slow kick-start to its operations in part due to suboptimal maritime links at the time the Freeport has matured constituting 6% of total imports and 10% of total exports over the last five years. The 1 (MFD), which runs supply-chain logistics related services in Zone 5 of the Freeport at Mer Rouge, has witnessed revenue growth in-line with increased 2 external trade. MFD derives revenue from dry warehousing, cold rooms, its container park, logistics, in-land transport, freight forwarding and office/industrial space rental. The company s turnover has grown at an annualised rate of 13.7%, since 2004, to Rs696M (+14% YoY) in FY14; which we expect to grow at 12.5% to Rs882M in II. Earnings In spite of steady Revenue (+14%) and EBITDA (+18%) growth 4 since 2004, MFD has either broke-even or registered losses 5 until These loss making years were the result of increasing depreciation and interest charges driven by the on-going development of infrastructure in Freeport Zone 5. Having now completed its development, debt is expected to be paid-down within a decade and depreciation hover at about 4%. We thus expect EPS growth to outpace EBITDA growth during the next few years. Re-current PAT doubled from Rs41M in 2013 to Rs83M in 2014; which we in turn forecast to edge up to Rs115M in 2015, then improve further to Rs174M in Fig. 2 MFD s recurrent PAT & key ratios against the bourse III. Risk Assessment Fig. 1 MFD s Revenue, EBITDA & Market Share Over the last decade, MFD has forged stronger ties with its client base as the company built new infrastructure and provided an increased range of services. Based on the sticky nature of its customers and diversity of services provided, we believe MFD may be able to offset a shortfall in one activity by gains in others. This would not be dissimilar to listed conglomerates nor, to some extent, the broader Mauritian economy. During FY-14 a greater demand for seafood operations offset the weaker demand for dry goods; and a larger volume of containers handled mitigated the fewer containers kept in storage. Therefore we expect MFD s revenue to grow 3 in tandem with the broader economy as well as the increasing external trade in years to come. Fig. 3 Key industry & MFD growth rates 1 Previously the Mauritius Freeport Development Co Ltd (MFRE) 2 Both total imports and exports have grown at annualised rates of 9% since Between high single-digits and low double-digits 4 Annualised 5 Except

3 The Mauritius Freeport is a duty-free logistics, warehousing, minor processing, and transhipment hub for the region. According to the Board of Investment, in 2013, Freeport facilities both at port and airport spanned a combined 180k m 2 with >260 companies in operation and some 390kt of goods handled. Key areas of operations revolve around supply-chain services, seafood hub, ship building and light processing of goods for re-export. Although the majority of the activity in the Freeport is consumer driven, and aided by preferential trade agreements, the likelihood that all of these sectors experiencing a simultaneous contraction or an abrupt end to preferential access lest for a major crisis is relatively low. extension of the quay at the container terminal, deepening of the navigation channel, new access roads, and as well as looking to make the port more efficient at transhipment. The Government s will to invigorate the port is likely to bring additional business, albeit in the medium term. Based on the potential for further development of the Freeport coupled with the absence of major risk factors, we believe MFD is poised to benefit from the steady monotonic growth of the Freeport lest for a major catastrophe. Fig. 5 Evolution of re-export segmentation since 2009 Fig. 4 Evolution of imports and re-exports within the freeport Growth for the Freeport sector has more-less tracked that of the broader economy, although a pick-up was noted in 2013 boosted by the seafood hub and new facilities at the airport. While Freeport imports have increased steadily from Rs5.8bn in 2009 to Rs10.3bn in 2013, Freeport re-exports have experienced greater volatility: dipping to Rs6.4bn in 2012 thereafter poised to rally to Rs9.6bn in Freeport imports have averaged 6% of total imports and reexports 10% of total exports. These mimic the broader external trade trends which are influenced by the cyclical nature of demand for consumer goods & staples. Further the diversified nature of business segmentation of Freeport trade has shown that it is possible to mitigate losses in some key areas {namely textiles (- 34%)} by growth in other areas {namely seafood activities (+10%), chemicals (+2%) and equipment excluding telecommunications (+26%)} as illustrated in Figure 5 below. In its budgets, Government has placed much emphasis on improving port infrastructure to become a regional transhipment hub. These include the liberalisation of bunker fuel storage and re-exports, increased dry-dock naval building/maintenance, IV. Forward Strategy MFD s forward strategy revolves around optimising its current operations; i.e. adequately managing dry/cold storage constraints against demand as well as improving effectiveness of its logistics supply-chain. Following the completion of its Zone 5 development, once business operations are fully optimised, growth will become incremental and monotonic 6. So as to provide a new spurt of growth in the future, MFD s board has recently re-structured the company under a group holding structure. Under the new umbrella, MFRE would become a fully owned subsidiary of MFD, and allow for the creation of new vehicles to expand its business in areas other than those allowed by MFD s restrictive Freeport licence. New domestic growth opportunities will stem from expanding its logistics supply-chain services outside the Freeport zone. Regional expansion is currently being looked into by management albeit at an exploratory phase. We appreciate management proactivity and forward-thinking to re-engineer MFD into a company with a lifespan well beyond its current 2055 expiry date. 6 i.e. grow in the low single-digits 3

4 CORPORATE STRUCTURE I. Overview The Mauritius Freeport Development Co Ltd (MFD) is a provider of vertically integrated supply chain logistics and services. The company s history began in August 1995 when it signed an agreement with the Government of Mauritius to develop an area of five hectares (5ha) within the Freeport 7 under a 60-Year Build- Operate-Transfer (BOT) contract. MFD s secured facilities include: 56k m 2 of warehousing, 16k m 2 of cold rooms, 14k m 2 of industrial spaces, 6.5k m 2 of office spaces, 120m of quay, a 7k TEU capacity container park, as well as its own transport fleet. Fig. 7 MFD s proposed change in business model III. Shareholding MFD s two main shareholders are MCB s associate and subsidiary PAD [31%] and FINC [15%] respectively which are also both listed on the Stock Exchange of Mauritius (SEM). Dentressangle Initiatives (DI) is a part of a French family owned logistics provider, followed by Concordia Offshore. Fig. 6 MFD s locale II. Business Model MFD has spent the last two decades building costly infrastructure in Zone 5 of the Mauritius Freeport at Mer Rouge in the Port-Louis harbour. As a holder of a Freeport licence, the company provides logistics, warehousing, and distribution inside the Mauritius Freeport Zone. Following the completion, in 2014, of all infrastructure development, MFD is approaching optimal capacity. Consequently, MFD s operations are approaching a level of maturity such that future growth would stem from value added services and increasing fees/rates. In order to create a new growth spurt, its Freeport license being restrictive in nature, management has re-organised the group in a manner more conducive for future growth and expansion beyond Mauritian borders. 7 Located at Mer Rouge in the Port-Louis harbour Fig. 8 MFD s top shareholders MARKET PERFORMANCE I. Share price MFD is only one of three pure industrials listed on the SEM and not comparable with either of FORT (heavy engineering) nor newly listed CARGO (logistics & warehousing in France). We have thus chosen to compare MFD against ROGE and IBL who carry out some freight forwarding, inland logistics, and ground handling. On a Year-on-Year (YoY) basis, MFD (+48%) beat the ATMI (-0.7%) and the ALEX-20 (-6.1%); as well as IBL (+8.9%) and ROGE (+47%). MFD s recent performance has been driven by its substantially improved financials and anticipation of rewards following a long 4

5 growing season. On a Year-to-Date (YTD) basis, MFD (-3.8%) has underperformed compared to peers IBL (+2.7%) and ROGE (+12%); but beat the ALEX-20 (-5.1%). of the Freeport as well as expansion within the region albeit slated for the medium to long term. Under current management, the company has re-organised itself into a group structure so as to extent the company s shelf-life beyond 2055; at which time all of MFD s infrastructure shall be gifted to Government as per its Build- Operate-Transfer agreement. Over the past decade, MFD s EBITDA has grown with double-digit rates, but consistently reported losses or broke-even until Now that all development is complete, MFD enters a new era where we expect to see good EPS growth in coming years. Given the appreciable level of accumulated losses over the years, MFD has been unable to pay dividends until its maiden 13-cent dividend declared on March 20 th 2015; i.e. with a pay-out ratio of 25% on EPS adjusted for unrealised losses/gains. MFD in our opinion is poised to become an attractive yield stock. Fig. 9. MFD s stock price performance against peers and benchmark II. Foreign Participation Foreign participation levels in sectors other than Banking, Hospitality and more recently property, has been negligible. The only noteworthy foreign activity on MFD was in 2006 with an inflow reaching Rs49M; which we believe to be DI s initial investment in MFD. VALUATION & RECOMMENDATION The Mauritian Freeport had humble beginnings in the mid-90s and only took-off at the turn of the millennium with the creation of a seafood 8 hub. The sector represents a modest 0.5% of Mauritian GDP and makes up a mere 7½% of all external trade. While Mauritius constitutes an attractive port-of-call for fishing vessels, modern transcontinental freighters do not necessarily require a pit-stop. In its budgets, government has decided to upgrade port facilities as well as convert Port-Louis into a regional re-fuelling/transhipment/seadfood hub 9. In the medium term, infrastructure upgrades coupled with the development of regional shipping, should attract additional vessels, thus enhancing current maritime connectivity. In our opinion, this budding industry has room to grow; however, it will require several years before infrastructure, demand, and hub all coalesce to create a new pillar in the Mauritian economy. Assuming MFD continues to grow in tandem with the Freeport sector and the broader economy, we forecast MFD s PER to stand at 15x in 2015 then drop to 10x in 2016; which stands below the ALEX-20 PER (16.4x) and Total Market PER (14.7x). Its Price:Earnings Growth (PEG) Ratio which have been negative in recent years, is poised to drop 0.67x in 2015 then 0.50x in Given that MFD is expected to pay-off its borrowings within a decade, its current Debt:Equity Ratio (DER) falls from 127% to 102% in 2015; i.e. Debt/Share will decrease from its current Rs8.70 to Rs7.85 in We valued the company using a steadily increasing pay-out ratio which reaches 70% within a decade. Our consensus valuation using a linear combination of Ratios, Net Assets and Free Cash Flow methods stands at Rs12.24 per share. Although the company appears to trading close [6% discount] to fair value, due to the company s realistic potential for even higher pay-out ratios, we introduce an ACCUMULATE rating for MFD. MFD s forward growth will stem from the optimisation of its current operations, expansion of its logistics supply-chain services outside of the Mauritius Freeport, benefitting from organic growth 8 Fish & Fish preparation exports exceed sugar by ~1.5x 9 A process already started as exemplified by VEM being allowed to import and sell heavier bunker oils 5

6 APPENDIX A I. Calculations Methods Bottom-line profit figures, e.g. Profits after Tax, Attributable Earnings, and EPS among, have all been adjusted for non-recurrent exceptional items. All per Share metrics or calculations requiring the No. of Shares have been computed using a single constant. AXYS has used the total number of issued shares by the company excluding treasury shares as given by its latest annual report. Our valuation reached from a consensus derived using three different valuation methods whose forecasting algorithms incorporate Monte Carlo methods. II. Price to Earnings Growth (PEG) Ratio PEG Ratio = Price/Earnings < EPS Growth > PEG Ratio 0 PEG < 1 Under-valued PEG = 1 PEG > 1 III. Enterprise Value Fair-Valued Over-valued EV = ( Shares LCP) + Cash Debt REFERENCES Statistics Mauritius, National Accounts Estimates, Sep Statistics Mauritius, National Accounts Historical Series, Sep Mauritius Freeport Development Co Ltd, Annual Report, Mauritius Freeport Development Co Ltd, Interim Results, Q1-07 Q2-14. DISCLAIMER AXYS Stockbroking Ltd has issued this document without consideration of the investment objectives, financial situation or particular needs of any individual recipient. Recipients should not act or rely on any recommendation in this document without consulting their financial adviser to determine whether the recommendation is appropriate to their investment of this document. This document is not, and should not be construed as, an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This document has been based on information obtained from sources believed to be reliable but which have not been independently verified. AXYS Stockbroking Ltd makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. AXYS Stockbroking Ltd and its officers, directors and representatives may have positions in securities mentioned in this document, or in related investments, and may from time to time add to or dispose of such securities or investments. AXYS Stockbroking Ltd is a member of the Stock Exchange of Mauritius and is licensed by the Financial Services Commission. AUTHORS Bhavik Desai Head of Research Melvyn Chung Kai To Head of Trading 6