Elevator Pitch
I rate International Container Terminal Services, Inc. (OTCPK:ICTEF) [ICT:PM], or ICTSI, as a Buy. On its investor relations website, the company describes itself as the “world’s largest independent terminal operator across six continents” which was “established in December 1987 in the Philippines” with its “flagship operation, the Manila International Container Terminal.”
This is an update of my August 30, 2019 initiation piece for ICTSI. In the latest write-up, my focus is on the expectations for the company’s FY 2024 financial performance, and its inorganic growth prospects. I raise my rating for ICTSI from a Hold to a Buy after considering the company’s positive outlook. A tariff hike for the Manila International Container Terminal will help to boost the company’s FY 2024 results, while ICTSI has both the intention and financial strength to engage in inorganic growth initiatives.
Investors should be aware that ICTSI’s shares are traded on the Over-The-Counter market and the Philippine Stock Exchange. The trading liquidity for the company’s OTC shares is low with a three-month mean daily trading value of slightly above $10,000 as per S&P Capital IQ data. ICTSI’s Philippines shares boast a higher average daily trading value of $8 million (source: S&P Capital IQ) for the last three months. Readers can engage the services of Singapore’s OCBC Securities and Hong Kong’s Boom Securities to trade in ICTSI’s comparatively more liquid Philippines-listed shares.
Expecting A Better Set Of Results For 2024 With Key Asset’s Tariff Hike
The company’s most recent Q1 2024 financial performance was good, and ICTSI’s full-year 2024 financial results are expected to be superior to that for 2023.
ICTSI’s earnings per share or EPS grew by +37% YoY from $0.072 in Q1 2023 to $0.099 for Q1 2024. The company’s actual first quarter bottom line beat the consensus EPS forecast of $0.08 (source: S&P Capital IQ) by +24%. Looking ahead, the sell side analysts are projecting that ICTSI’s top line growth will accelerate from +6.5% last year to 10.0% this year. Also, the market sees the company’s EBITDA margin expanding by +100 basis points to 64.0% for FY 2024. The consensus financial projections are obtained from S&P Capital IQ.
In the earlier part of this article, I indicated that ICTSI’s key asset or “flagship operation” was “the Manila International Container Terminal.” Also, the company’s 2023 annual report reveals that the Manila International Container Terminal boasts a “70% share of the international container traffic in Manila.”
A recent June 21, 2024 article posted on PortCalls Asia (ports industry news portal) noted that “The Philippine Ports Authority approved the 16% increase in cargo-handling tariff at Manila International Container Terminal.”
ICTSI guided at the company’s Q1 2024 analyst call (audio recording and transcript not publicly available) that its revenue per TEU or yield could potentially increase from $182 in the previous fiscal year to between $190 and $200 for the current fiscal year. It is realistic to think that the increase in tariffs for ICTSI’s key Manila International Container Terminal asset will be supportive of the company’s FY 2024 guidance pertaining to yield expansion.
Inorganic Growth Prospects
ICTSI has the intention to execute on inorganic growth initiatives, and the company has the financial capacity to support future acquisitions or investments.
At its earlier Annual Shareholders’ Meeting in April this year, ICTSI stressed that it is “actively looking for investments in regions” where it has been “successful” like “Asia, Latin America, Africa, and the Middle East.” It is reasonable to infer from the company’s comments that ICTSI views inorganic growth as a key priority.
The company’s cash flow generation is strong and its balance sheet is healthy. Free cash flow for ICTSI increased by +46% YoY to $358 million in the recent Q1 2024, which is equivalent to an impressive free cash flow margin of approximately 12%. As of March 31, 2024, the company’s debt-to-EBITDA ratio was a reasonably manageable 1.8 times. ICTSI also has limited refinancing risks, considering its long weighted average debt maturity period of 4.7 years. The above-mentioned metrics were sourced from the company’s Q1 2024 earnings presentation slides. ICTSI’s trailing twelve months’ interest coverage ratio is also decent at 3.7 times as per S&P Capital IQ data.
There is a potential near-term inorganic growth driver in sight for ICTSI. South African media publication The Mail & Guardian reported in April 2024 that ICTSI was chosen as “the preferred bidder to partner in a 25-year joint venture to develop and upgrade” the “Durban Pier 2 Container Terminal.” This will be a significant deal for the company. The Durban Container Terminal “handles 72 percent of the port’s throughput and 46 percent of South Africa’s port traffic” and is referred to as ICTSI’s “largest operation in Africa” as per the company’s disclosures.
At its Q1 2024 analyst briefing, ICTSI noted that it remained confident that it can conclude the Durban Container Terminal transaction by the third quarter of the current year. This deal would have been completed even earlier in 1H 2024, if not for a legal case filed by Maersk (OTCPK:AMKBY) (OTCPK:AMKBF) (OTCPK:AMKAF), which lost the bid for the Durban Container Terminal. A May 7, 2024 Bloomberg report mentioned that Maersk “seeks to overturn the award of a concession to run” the Durban Container Terminal on the basis that ICTSI “fell short of tender requirements.” A potential short-term re-rating catalyst for ICTSI will be the completion of the Durban Container Terminal deal, if and when Maersk is defeated or withdraws its lawsuit.
Even if the conclusion of the Durban Container Terminal transaction is delayed due to legal issues, ICTSI’s inorganic growth prospects for the intermediate term remain bright. As mentioned above, the company has both the ability (financial strength) and the willingness (Annual Shareholders’ Meeting comments) to identify and execute on new inorganic growth initiatives.
Variant View
Certain scenarios pose downside risks to ICTSI’s outlook.
If there are unfavorable economic or political developments in the Philippines or other markets where the company’s assets are located, ICTSI’s actual volume or revenue growth might come in below expectations.
ICTSI could find it hard to execute on the company’s inorganic growth strategy, if assets available for sale are overpriced or that regulators tighten their approval criteria for potential M&As or investments.
Final Thoughts
ICTSI’s outlook is favorable as per my analysis outlined above, and the company’s shares are undervalued. The stock’s PEG (Price-to-Earnings) multiple is 0.74 times or below the 1 times that implies fair valuation. This is calculated based on its consensus next twelve months’ normalized P/E of 17 times and its consensus FY 2023-2026 normalized EPS CAGR estimate of +23% (source: S&P Capital IQ).
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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