Description
I recommend a long in Hamburger Hafen. The company is fairly small with a low float (€1.5B market cap), international, and the Company is 68% owned by the city of Hamburg, but it is a well-managed asset attractively valued at ~15x 2019A earnings (a discount to the historical ~19x P/E multiple), and has some discrete catalysts on the come to grow their earnings meaningfully over the next few years.
HHFA's primary asset is the Port of Hamburg in Germany, one of the largest container seaports in Europe. The Hamburg port is Germany's largest logistics hub and benefits from a favorable deep inland location centrally located between the trade flows of Asia, Central / Eastern Europe and the Baltic region and dense connections to sorrounding railroad and feeder networks. ~55% of container volume throughput is related to import/export trade flows from the Far East with the remainder distributed between the Baltic Sea (11%), Scandinavia (10%), North America (10%) and other geographies.
Favorably-located ports like Hamburger Hafen are good businesses. They produce strong cash flows, earn good returns on capital (mid-teens ROCE) and benefit from high barriers to entry by virtue of their location advantages, infrastructure networks and regulatory restrictions. However, the business is also highly cyclical with significant operating leverage. Hamburger Hafen's EBIT declined from €200M to €153M in 2020 due to declines in container throughput in the current recession.
HHFA's main challenge has been a multiyear erosion in market share to other ports in the region (Rotterdam, Antwerp and other North Range ports). Hamburger Hafen's market share of North Range container throughput has declined from 20% to 16% over the last 10 years due to limitations in the the port's ability to accommodate and service the shipping market's evolution towards large ship sizes, although I believe this is now set to change.
Despite the setback of the current recession, Hamburger Hafen has outlined and reiterated a target of €300M in EBIT by 2025, which represents a significant ramp over the next few years from the €204M of EBIT achieved in 2019 and €153M of EBIT in 2020. The target is underpinned by a few key developments the next 5 years:
- Volume recovery post-COVID and general GDP growth thereafter (container throughput expected to roughly track / slightly lag GDP growth)
- A large investment program in efficiency and automation through 2022 (major investments in cranes, robotic handling, IT system digitization, etc.) that should enhance HHFA's ability to service larger ships and manage peak loads, improve margins, and mitigate labor pressures. Capex should normalize after 2022
- A major dredging project of the Elbe waterway is finally underway after years of governmental delays. The dredging will broaden and deepen the waterway in Hamburg, reduce waiting times, and resolve Hamburg's historical inability to service mega-ships, thus improving the port's competitive position versus North Range competitors. The dredging is underway and expected to be completed by the end of 2021 with benefits realized starting in 2022. Hamburger Hafen has lost around four points of throughput share in the North Range since 2008, and I estimate every share point improvement could drive ~€25M of incremental EBIT (~42M of North Range annual container throughput proceeds; ~€100 container revenue per TEU at ~60% incremental margins).
If Management can deliver on €300M of EBIT in 2025, Hamburger should deliver ~€150M of net earnings. At a 20x P/E (roughly in line with historical levels), I see scope for a €40 per share in 2025 with ~€4 of dividends along the way, or ~2.4x MOIC from current levels.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Elbe waterway dredging
