Buy of Gangavaram port and rail asset likely to be accretive; FY22/23 PAT up 7%; TP raised to Rs 810 from Rs 660; ‘Buy’ maintained
To reflect these, we have raised our FY22-23e earnings by 7% in each year.
After market close on 3 March 2021, APSEZ informed the stock exchange about its intention to acquire a minority stake (31.5%) in multipurpose Gangavaram Port (GPL, not listed), the largest port in Andhra Pradesh, near Vizag. Further, APSEZ is buying rail assets (the Sarguja Rail Corridor) from its promoters with the intention to integrate all its rail assets. Put together, both transactions would account for just 4.4% of APSEZ’s current EV (4.5% of market cap). While the rail asset will be funded by issuing 71m new APSEZ equity shares to the promoters, the GPL acquisition will be funded by cash.
So what? During the call, mgmt said both transactions will be EPS accretive straightaway. It has agreed to acquire a minority stake in GPL from Warbug Pincus (PE) at an implied EV/Ebitda multiple of 8.9x and a PE of 12x based on FY20. With 50% utilisation and APSEZ’s track record of squeezing costs from operations while lifting realisations, the acquisition could be highly accretive over time.
APSEZ is exploring an option to acquire an additional stake from the promoter of GPL to gain management control and has agreed to buy a 100% stake in Sarguja Rail Corridor (SRCPL) from its promoters against an equity swap for a consideration of Rs 47.7 bn (EV of Rs 60 bn). This implies a FY22e EV/Ebitda multiple of 11.5x on APSEZ’s estimates. Moving towards market dominance in supply chain infrastructure: The proposed acquisition of GPL would bring APSEZ’s share of the overall port market to 30% (from 26%). Reorganising its rail assets would not only enable it to expand in this vertical, but also quickly make it a large player in landside logistics. To reflect these, we have raised our FY22-23e earnings by 7% in each year.
Maintain Buy; raise DCF-based TP to Rs 810 (from Rs 660). With strong cash flows and conceivably lower capex in the core port business, it wouldn’t surprise us if APSEZ’s holistic approach enables it to expand to other related verticals such as building feeder network and air cargo. To reflect this, our revised TP of Rs 810 now models long-term growth of 4.5% (from 3.5% previously) beyond FY27e. Year-to-date, ADSEZ’s share price has increased 20% versus an 8% rise in the local index. The stock trades at 16.1x consensus 12-month forward EV/Ebitda, 1.5 SD above its historical average of 13.1x since 2011.