Brexit Update

a redirection of demand to other ports – especially those nearer to Midlands distribution centres and with available land for storage. The dwell time for a trailer is around 1.5 days for an import unit on average, while (historically at least) dwell time at Dover – under good conditions – was a matter of minutes. This factor, and increased use of containers, will continue to shape the market.

It may well be the case that the accompanied truck sector will become increasingly focused on perishable goods and other very high value cargoes that are truly time sensitive.

8 Figure 1

16

UK Container Port Demand 2015-2022 - million TEUs

14 The situation is further summarised in Figure 2. Total shortsea trade volumes have been partially constrained by Brexit, but this effect is limited. However, increased bureaucratic pressures at Channel ports has seen a redirection of demand to other ports – especially those nearer to Midlands distribution centres and with available land for storage. The dwell time for a trailer is around 1.5 days for an import unit on average, while (historically at least) dwell time at Dover – under good conditions – was a matter of minutes. This 2 factor, and increased use of containers, will continue to shape the market. It may well be the case that the accompanied truck sector will become increasingly focused on perishable goods and other very high value cargoes that are truly time sensitive. Figure 2:

12

NON-BREXIT INFLUENTIAL FACTORS

The overall development of demand – and its modal distribution – has also been influenced by several non-Brexit factors: 5 The shortage of truck drivers is a pan-European issue and is forecast to worsen in the next few years. This has increasingly favoured the unaccompanied sector. The use of ferries to northern ports significantly reduces driver demand, with multiple daily pick-up journeys to/from ports serving the Midlands and the North becoming an increasingly viable possibility. This shift favours ports with available land. 5 These benefits have been further underlined by the broader trend towards green initiatives. Using a vessel to deliver goods nearer to destination is a positive in this respect. 5 Increased Brexit bureaucracy is an issue but is likely to be eased as a new equilibrium is finally achieved as the political temperature cools. 5 The imbalance in the UK shortsea trades is also influencing developments. There is very limited export potential in the south, but the north of England offers much more potential.

An improved trade balance (with resulting lower overall costs) is also influencing demand. 5 There has been much talk of increasing direct freight flows between Ireland and the rest of the EU by eliminating the

UK landbridge and some services have been increased. So far, however, this has been limited and Irish Sea traffic remains robust.

It might be assumed that all this will result in the reanimation of smaller ports in the south that have had a role in these trades in the past. This could be a factor, but the introduction of much larger RoRo freight ferries in the North Sea will ultimately limit the potential here.

PORT INVESTMENT IMPLICATIONS

These changes are already having a direct influence. The development of terminals on the East Coast, where land is relatively cheap (and available) and larger vessels can be

10 8 6 4 0

2015 2016 2017 2018 2019 2020 2021 2022E Deepsea Shortsea 8 Figure 2 UK Shortsea Imports by Mode 2015-2022 - percent of tonnages 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2015 2016 2017 2018 2019However, it is apparent that UK deepsea trade continues to be driven by macro-economic factors 2020 2021 2022E and is linked to the s RoRo Accompanied RoRo Unaccompaniedcale of the economy. This has not changed, although the use of continental LoLo feeder hubs for this traffic complicates the analysis. In 2019 total TEU volumes reached some 14.3m handled, has been directly behind the initiative from TEU, with this contracting in 2020 and since recording some recovery. Preliminary estimations indicate a total of Associated British Ports (ABP) to develop increased facilities and new berths at Immingham on the Humber. Further south, NON-BREXIT INFLUENTIAL FACTORSsome 14.2m TEU this year. Within this, there has been a limited proportional the Medway ports are also recording increased unaccompanied trailer volumes as a direct result of difficulties in Dover and are said to be targeting developments. The overall development of demand – and its modal distribution several non-Brexit factors decline in direct deepsea, with this reflecting increased continental feedering to smaller ports as a result of well-publicised congestion in the major gateways. – has also been influenced by The factors driving changes in post-Brexit shortsea trade are seen to be complex and still have a long way to play out. But these changes offer major potential for such developments. The shift to increased use of unaccompanied trucks and LoLo containers seem certain to further increase interest in § The shortage of truck drivers is a pan-European issue and is forecast to worsen in the next few years. This has increasingly favoured the unaccompanied sector. The use of ferries to northern ports significantly reduces driver demand, with multiple daily pick-up journeys to/from ports serving the Midlands and the North becoming an increasingly viable SHORTSEA TRADE STRUCTURE The key area of interest, however, is trade with the EU and other secondary European markets which are captured in the UK port statistics as ‘shortsea’. So, what has actually happened? hitherto ‘unfashionable’ ports on the North Sea coast and possibility. This shift favours ports with available land. new investment can clearly be anticipated. Far-reaching § These benefits have been further underlined by the broader trend towards green initiatives. Table 1: UK – Shortsea Trade, 2015 –changes are underway.Using a vessel to deliver goods nearer to destination is a positive in this respect.2022E, million tonnes § Increased Brexit bureaucracy is an issue but is likely to be eased as a new equilibrium is UK - Shortsea Trade Since 2015 finally achieved as the political temperature cools. - million tonnes § The imbalance in the UK shortsea trades is also influencing developments. There is very Import 2015 2016 2017 limited export potential in the south, but the north2018 2019 2020 2021 2022E of England offers much more potential. RoRo Accompanied 20.25 20.10 19.11 An improved trade balance (with resulting lower overa18.19 17.64 16.79 16.42 15.66 ll costs) is also influencing demand. RoRo Unaccompanied 13.60 13.28 13.84 14.14 13.91 13.39 14.55 14.85 LoLo 10.44 9.96 13.75 14.92 13.83 12.61 14.70 15.33

Total UK Shortsea Import 44.28 43.34 46.70 47.25 45.38 42.79 45.68 45.84 Exports

RoRo Accompanied 13.13 13.42 13.21 12.28 11.44 10.08 10.89 10.44 RoRo Unaccompanied 7.13 7.30 7.79 8.08 7.62 7.10 8.06 8.35 LoLo 5.06 4.72 6.49 6.52 6.08 5.06 5.49 5.50

Total UK Shortsea Export 25.31 25.44 27.49 26.88 25.13 22.24 24.44 24.29 TOTAL 69.60 68.78 74.19 74.13 70.50 65.03 70.11 70.13

- excludes Ireland Source: DfT / MPL Table 1 provides a summary of developments since 2015 in terms of cargo tonnages. Trade volumes expanded by around 6.5 per cent between 2015 and 2018 and then contracted in 2019 with this

8 Table 1: UK –

Shortsea Trade, 2015 – 2022E, million tonnes

Source: DfT/MPL

TERMINAL VALUATION MOVES

Johan-Paul Verschuure of Rebel examines valuation activity in the container terminal sector: current and forward trends; investor profiles and strategic thinking

The global port industry rollercoaster has not stopped with fresh surprises popping up. Sharp rises in interest rates, increased revenues for terminal operators and strong variations in demand growth across continents are key themes in 2022. These factors are “shifting the box business” with different types of investors taking charge, a new port finance landscape and a new balance of power. Although the future is highly uncertain some early conclusions can be drawn.

INTEREST RATE HIKES

The increase in interest rates is expected to result in lower M&A activity from the financial sector. Infrastructure funds have been benefitting from the low interest rates for some time increasing their stake in the port and terminal industry. Their leveraged deals and low return requirements from the partners of these funds has driven high valuations and delivered winning bids.

Looking, however, at the deals in 2022 so far, it seems that the activity of the financials is at the same level as last year. The scenario has not yet emerged of rising interest rates lowering deal activity and valuations. One explanation for this could be that the deals undertaken so far this year were already partially prepared last year

Supported by current massive liner profits, industry players have begun to take back control in the M&A market. An increasing number of deals in recent months involve shipping line linked terminal operators. It is also notable that overall the number of deals processed this year has actually increased relative to 2021. Privatisation and greenfield developments have seemingly taken the upper hand after years of infrastructure funds dominating M&A headlines.

INCREASED REVENUES?

Despite a jump in revenues in 2021, financial results do not point to a much more profitable business model for the sector. Global Terminal Operators (GTOs) were faced with increased costs which has partially offset the jump in revenues. When reviewing the financial accounts for nine of the ten largest port operators, combined revenues jumped by 24 per cent in 2021 vis-à-vis 2020. This is much higher than the 2.6 per cent in 2020 and average of 10.4 per cent between 2017-2019.

The analysed major port operators saw their combined volumes increase by 8.7 per cent in 2021 – significantly exceeding the earlier average. On a terminal ownership adjusted basis, volumes grew by just over seven per cent in 2021 for these operators, according to Drewry. Higher storage revenues, therefore, seem to be the main reason for the revenue jump, followed by increased volumes.

However, the corresponding EBITDA grew at a marginally slower pace. Although terminal operators may have had some flexibility with front loading expenditure now that revenues have increased.

APMT and ICTSI are showing an improvement in margin, while DPW is facing a high growth in its cost base offsetting very healthy revenue growth. The rising costs are most likely an effect of the congestion witnessed at the terminals in combination with COVID-19 measures reducing the efficiency of operations and resulting in additional costs for the operators. However, if the tariff levels can be maintained and efficiency improves in the coming years, the upside may still come.

REGIONAL DEMAND DIFFERENCES

In 2022 strong regional differences in container demand are underway. While inflation has been soaring for several months, consumer spending (in particular in the US) has held up surprisingly well. This was undoubtedly partly due to large savings built up during the COVID-19 years, but even with a return to more typical conditions, demand has kept up in recent months with fresh throughput records noted in some ports. Similarly, in the Far East the picture is also positive.

In contrast, Europe has witnessed a steep drop in demand, mainly due to a drop in Russian trade. Africa and South America also recorded declines in comparison to last year.

Overall demand has not yet taken the hit many were expecting given the global macro-economic conditions. As a consequence, strategic port investments and even greenfield ports are popular topics again. If inflation remains high, container demand will soften further. And with the first newbuilds ordered during the first COVID-19 wave coming into operation, the ‘bullwhip’ effect could lead to fast adjusting conditions in the opposite direction. This is something Maersk’s CEO indicated in June as a possible scenario. In addition to downward pressure on freight rates, it may also impact confidence in the container terminal business.

8 The winning

bid for Jawaharlal Nehru Port Container Terminal (JNPCT) at Nhava Sheva Port, Mumbai factored in the terminal’s strategic value to a major liner affiliate

IMPACT ON VALUATIONS

Rapidly rising interest rates will theoretically impact valuations for port assets. Increased cost of capital, by definition, will drive down the high multiples seen in the last few years. Where historically EBITDA multiples are typically between 12 and 15, several recent transactions reached over 20 times EBITDA. Currently the base interest rate on US 10year government bonds is still hovering at the peaks of 2013 and 2018 and in that sense remain historically relatively low. Using standard valuation metrics with average two per cent growth per year and an increase in cost of capital from 5 to