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Bahrain IPO highlights overcapacity

Originally touted as a transhipment hub for the upper Gulf region, IPO reveals APM Terminals Bahrain is operating at 40% capacity and handling almost no transhipment traffic at all.

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Bahrain IPO highlights overcapacity

An IPO has been launched for 20% of the shares in APM Terminals Bahrain, which has the 25-year concession to operate the Khalifa Bin Salman Port (KBSP). The IPO is expected to raise US$30M.

APM Terminals Bahrain is a joint venture between APM Terminals International BV (80%) and YBA Kanoo Holdings of Bahrain (20%). Both companies will reduce their holdings proportionately after the listing, which if successful would leave APM Terminals with a 64% holding and YBA with 16%.

The terminal opened in 2009 with an initial capacity of 1M TEU, a figure it was expected to reach by 2014, APM Terminals then regional manager Charles Menkhorst said in 2010. The terminal can be expanded to 2.5M TEU and was developed in part to serve as a transhipment hub for Saudi Arabia, Iraq, Iran and Qatar.

Transhipment business, however, has proved difficult to develop. The terminal was handling transhipment services for Hanjin and APL, but by 2016 that business had dwindled to 5,342 TEU. Last year the terminal took the drastic step of reducing transhipment charges by 50% in a bid to attract customers, but it only handled 2,338 TEU of transhipment traffic. In the first six moths of 2018 that dropped further to just 148 TEU.

KBSP is now almost entirely an import export port, handling containers, break bulk and general cargo, including automobiles, for the domestic market. The port’s total container volume rose from 379,817 TEU in 2016 to 400,307 TEU in 2017. In H1 2018 throughput stood at 220,173 TEU.

As noted, when the concession was agreed Bahrain had high hopes it would be able to grab a share of the transhipment traffic in the region. In fact the concession gave APM Terminals Bahrain exclusive rights to develop a box terminal for only the first 15 years of the 25-year concession, suggesting it was envisaged another container terminal would be needed.

The concession also included transhipment volume and operational KPI guarantees. APM Terminals Bahrain has meet or exceeded all the performance related KPIs for crane and berth productivity, but not meet the required transhipment volume stipulations, or the annual TEU per metre of berth KPI requirement.

In fact the failure to meet the transhipment targets has placed the company in technical breach of the concession requirements, which gives Bahrain’s Ports and Maritime Affairs Authority (PMA) the right to initiative the process to terminate the concession. However, the IPO states that this is not intended: “The Ministry of Transport and Telecommunications confirmed in a letter dated 28 June 2015 that it shall not apply the termination right in the Concession as long as APMT Bahrain continues the efforts to reach the required transhipment level and the Ministry being comfortable with the same”.

While it has not moved to terminate the concession, the PMA has implemented penalty payments for failing to achieve transhipment targets. The IPO notes: “APMT Bahrain has not achieved a transhipment target for any year since it started to operate KBSP. This increase in the Nominated Percentage for not meeting the transhipment target can be of 1%, 2% or 3% depending on the percentage of transhipment targets achieved. An additional 3% was paid for failure to meet transhipment targets in each year from 2012 to 2017. It is anticipated this will continue”.

The PMA is no doubt disappointed that giving the concession for KBSP to APM Terminals has not resulted in Maersk Line supporting the facility with significant transhipment business. However, the bigger problem is really the significant over capacity in the region, with too many terminals now vying for transhipment business, including the expanded port of Dammam in Saudi Arabia, where the PSA is one of the JV partners in a second box terminal at King Abdul Aziz Port.

The investment prospectus for the IPO noted that total box port capacity in the Middle East was estimated at 57.6M TEU in 2016, compared to actual port throughput of 38.5M TEU, giving a utilisation rate for terminals in the market of 66.8%. Due to expansions and new developments, capacity is forecast to jump to 70.8M TEU by 2021, while port throughput is projected to grow to only 45.6M TEU. This would lower the box terminal utilisation rate further to 64.4%.

Against this background the IPO is being pitched a a chance to invest in a profitable import/export gateway port that is “the only general commercial port facility in Bahrain.” The IPO notes the Government has assured KBSP in August this year that it has no plans to grant any further concession rights for a new container terminal in the short or medium term. This leaves KBSP as the only port serving a population of almost 1.5M people.

However, perhaps reflecting the lack of transhipment prospects, the IPO price has been set very low. The offer shares are priced at BHD 0.660 per share, equating to a price-to-earnings (P/E) ratio of 5.7x 2017’s net earnings of BHD 10.4 million. A P/E ratio of 5.7 is well below the market average of 14/15 x net earnings.

APM Terminals Bahrain called this an “attractive valuation of the IPO”, and quoted Najla Al Shirawi, the CEO of SICO, the mandated lead manager for the IPO, saying: “The much-anticipated public offering of APM Terminals is a proxy on the Kingdom’s growing non-oil economy, it offers investors extremely attractive pricing and a dividend yield of 15.5% on the offer price based on dividends paid in 2017. Given the strong investor appetite that we have been witnessing we wanted to ensure that retail investors have equal access to the market opportunity by allocating up to 15,000 priority shares per retail applicant within their 30% allocation. We look forward to a highly-successful, fully-subscribed IPO in the weeks to come.”

Finally, while APM Terminals is in the process of reoganising its terminal asset portfolio, including selling down stakes in some facilities and exiting others altogether, the IPO does not appear to be linked to that process. The original concession specified that within 5 years of the commencing operations APMT Bahrain was required to convert to a public joint stock company by either offering new shares or by the existing shareholders offering at least 20% of their holdings in an IPO. That date was reached in March 2014, but the parties agreed to extend the date for the IPO to October 2018.

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