Piraeus Port Authority (PPA GA) – The Gateway

The port of Piraeus is the chief sea port of Athens. It is also plays a major role in global supply chains, being majority owned by China Ocean Shipping Company (COSCO). In the period between COSCO assuming majority ownership and the onset of COVID-19, the port saw a dramatic uplift in performance. PPA has a large-scale investment framework which, allied to the recovery in trade volumes following the COVID shock is likely, in my view, to lead to further meaningful growth in the coming years.

But first, some background. Trawling through previous annual reports shows that the high water mark for the Piraeus Port Authority (PPA) was 2007. In that year, it delivered revenue of €171m, gross profits of €45m (a 26% margin) and net income of €25m. Business was good, and management clearly felt positive about the future. Cash capex rose from €18m in 2007 to €37m in 2008 and €79m in 2009. The Greek debt crisis soon kicked off, however, with the first austerity package being passed by Athens in February 2010. The IMF’s WEO database shows that Greek annual real GDP contracted in every year from 2008 to 2013, and again in both 2015 and 2016. Since then, the country saw modest growth (ranging from 1.3%-1.9%) over 2017-2019, before the COVID shock saw real GDP contract by 8.25% last year. The IMF forecasts that Greece will grow by 6.5% this year, and by a further 4.6% in 2022 and 2.6% in 2023.

The Troika impressed upon Athens the need for privatisation to help arrest the country’s fiscal position. In January 2016 COSCO was selected as preferred bidder for a majority stake in PPA. COSCO initially took a 51% stake, with an agreement in place to raise this to 67%, subject to the delivery of a major investment programme. The then Greek PM, Alexis Tsipras, said “this agreement will shorten even more the Silk Road that brings goods from China to the Mediterranean and central Europe”, while COSCO’s Xu Lirong said its planned investments “will help PPA reach its full potential to become one of the leading ports in Europe”.

COSCO plays a critical role in China’s Belt and Road Initiative, with its European footprint comprising operations at Piraeus, Bilbao, Valencia, Zeebrugge, Antwerp, Hamburg, Rotterdam and Vado Ligure (near Genoa). Piraeus affords COSCO access to markets far beyond Greece, given extensive transport links.

PPA’s 2020 Annual Report shows the benefits of being interdependent with COSCO. That year, €73m of the Group’s €133m in revenues were to connected parties, mostly Piraeus Container Terminal (PCT), which is a separate subsidiary of COSCO. PPA operates one of the three container piers at Piraeus, with PCT operating the other two.

2020 also saw Piraeus retain its position as Europe’s fourth busiest container port. It is worth noting that in 2007 it was only ranked 17, so becoming China’s gateway to South-Eastern Europe has demonstrated economic benefits.

How else can we see the impression of COSCO on PPA’s performance?

In 2015, the year before COSCO took a majority stake in PPA, the Group had a gross margin of 26%. Between 2017 (the first full year of majority ownership) and 2020, the margin has ranged between 35% and 50%. Revenue rose from €100m in 2015 to €149m in 2019 (it slipped to €133m last year, due to COVID’s impact). Administration costs can be a bit volatile, but it’s worth noting that they have averaged €21.6m p.a. over the five years that COSCO has been involved in the management of PPA, versus an average of €21.5m p.a. in the five preceding years, despite a material increase in throughput at the port.

PPA has been delivering strong cashflows in the period of COSCO control. Net cash from operations has averaged €45m p.a. over 2017-2020, compared to an average of €17m p.a. in the preceding 10 years.

However, this cash has not found its way into the capex line in a meaningful way. Under the 2016 agreement between the Hellenic Republic and COSCO, the latter was to help deliver 11 mandatory investments at PPA. As of the end of 2020, only €83m of cumulative investment towards these had been made, versus a reference amount in the Concession Agreement of €294m. In four of the 11 investments, cash capex equivalent to only 1% of the reference amount in the agreement had been paid by end-2020. Undoubtedly, COVID-19 played a role in at least some of these outcomes, although I note media reports (FT) that say “China has blamed the delays on Greek bureaucracy and local opposition”. Whatever the truth though, there have been a number of announcements in recent months (e.g. here and here) that point to movement on the infrastructure pipeline. A further factor that gives me optimism is that when the Greek government transferred the additional 16% of PPA to COSCO earlier this year, it came with the string attached that Athens will reclaim the shares if the investments are not completed within five years. Lastly, PPA’s financial strength is a significant reassurance – the Group balance sheet at end-2020 shows cash of €111m, while borrowings are less than half that amount – and, crucially, the cashflow performance in recent years shows that PPA is well capable of spending €200m+ on the mandatory investments (it has identified a further €167m of non-mandatory capex projects that it wishes to undertake, which further underlines management’s confidence).

Let’s have a look at the more recent performance. PPA has five distinct business areas – Container Terminal; Car Terminal; Coastal Traffic; Cruise Activity; and Ship Repair Activity.

In Container Terminal, total volumes of 541k TEU (twenty foot equivalent units) in 2020 were +10.5% y/y and a new record under the period of COSCO control (they were just 266k in 2016).

In Car Terminal, volumes fell to 305k cars last year from 404k in 2019, due to the disruption in the new car market caused by COVID-19 economic impacts.

Coastal Traffic mainly relates to domestic business. Passenger numbers had ranged between 15m and 17m in the years leading up to 2020 but slipped back to 10m last year.

Cruise Activity collapsed last year, with just 76 cruise ship arrivals (versus 622 in 2019) and 17k disembarking passengers (versus 1.1m in 2019).

Ship Repair activity had a mixed 2020, with slightly more vessels using dry docking facilities (121 versus 112 in 2019) but only 254 using repair facilities (versus 292 in 2019).

In terms of the outlook, Bloomberg ‘consensus’ (note that most of the numbers here have only one analyst inputting to them) is set out below.

As can be seen in the above, market forecasts are for revenues to rise 12% this year, which seems fair given the reopening, with further growth in the coming years (+6% in 2022, +4% in 2023). However, the cumulative improvements seem a little light to me. Earlier this month PPA guided that it is expecting more than 700 cruise ships to visit in 2022, which is well above the pre-COVID level. Wrinkles in global supply chains and (not unrelated) auto production should, in my view, see Car and Container activity rise at an above-trend pace for a number of years. A 50% jump in coastal traffic from 2020 levels would only bring it back to the pre-COVID level. Lastly, PPA’s infrastructure programme has a number of items that should drive additional volumes, including: (i) Passenger terminal expansion; (ii) Expansion of car terminal; (iii) Improvement of ship repair zone infrastructure; and (iv) Construction of a new cruise passenger terminal. Lastly, I would note that the €164m in revenues forecast for 2023 lags the 2007 level of €171m. Sure, it is possible that some of this may reflect leakage to the PCT piers, although Piraeus’ climb up the league tables of Europe’s busiest ports suggests that a rising tide has lifted all boats here.

In terms of the valuation, a forward PE multiple of just 10.2x (5.7x EV/EBITDA) and a dividend yield of 3.7% seems to me to be very attractive for what is a globally significant trade hub. Yes, COVID-19 has not yet gone away. Yes, there are still supply chain issues that need to be ironed out. Yes, there are unpleasant geopolitical issues in the wider region. However, while these are challenges, I don’t see any permanence to them. The world is getting smaller. And I’m happy to have a way of playing that structural shift – PPA – in my portfolio.