ICTSI spreading its emerging market wings

Port operator ICTSI, which is controlled by Philippine billionaire Enrique Razon, isn't daunted by the risks of expanding beyond Asia to places as diverse as Honduras, Nigeria and Argentina.

Martin O’Neil, the CFO of ICTSI, is no stranger to operating in volatile places. The port operator controlled by Philippine billionaire Enrique Razon is one of the few Philippine companies with a broad presence across global emerging markets, having expanded its footprint beyond Asia to places as diverse as Nigeria, Honduras and Argentina.

But venturing into these far-flung countries isn't so daunting when ICTSI's home turf is itself considered an emerging market and hardly sheltered from occasional turmoil. Indeed, shortly after O'Neil spoke with FinanceAsia, one of the most powerful storms on record wrought devastation on the Philippines' central islands.

"In a way it is familiar to us," O'Neil said in the phone interview from Manila. Having a broad geographical presence can also spread the risks and help drive earnings, he added.

ICTSI started out in the Philippines when it won the concession for the Manila International Container terminal in 1987. But the company has since grown offshore, either by taking over terminals from governments that were privatising those operations or by building new terminals overseas. It has also bought stakes in companies, as it did last year when it bought a 35% share in Pakistan International Container Terminal.

Targeting markets where there is a lack of capacity or where it can earn a return by improving efficiency, ICTSI's annual capital expenditure in the last two years has ranged between $450 million and $475 million. But that is set to decline, particularly in 2015 and 2016, as ICTSI has just completed a new terminal in Mexico and nearly finished another terminal in Argentina. The company also has a joint venture with the Port of Singapore Authority to develop a new terminal in Colombia.

These new projects are expected to drive earnings and reduce the contribution to overall earnings from ICTSI's business in Asia, from around 55% currently to about 40% in the next few years.

"Over the next two to three years we see growth coming from start-up capacity in Mexico, Argentina and Colombia," said O'Neil.

Unless it makes a surprise major acquisition, the company is unlikely to need to raise fresh capital next year, he said. 

Carving out a footprint across global emerging markets comes with its pitfalls, as the company experienced in Syria where it was forced to pull out last year due to a civil war. “Syria was nothing short of an event of force majeur,” said O’Neil. “We didn’t go into Syria anticipating a civil war but those things can happen,” he said.

The company nonetheless has a sufficiently wide portfolio of assets to help spread the overall investment risk, he added. "Any one of the markets we operate in has a fairly high degree of risk, whether politically or economically, but when you assemble a diversified portfolio, if something happens in a place like Syria, it doesn't affect the other operations we have," he told FinanceAsia.  

That said, ICTSI has less exposure to China compared with other port operators, partly because valuations there are no longer cheap. "We were relatively slow to get into China and by the time we looked there, the prices had gone up a bit," said O'Neil.

Long-term capital needs

ICTSI tapped equity markets in May with a $200 million share offer -- its first since 2007 -- and the company has been an active borrower in dollar bond markets. In January it issued a $400 million 10-year bond and in August it concluded a bond exchange -- arranged by Citi and Credit Suisse - to replace its bonds maturing in 2020 with a new 12-year bond, making it the first Philippine company to issue a bond of that maturity.

In May 2011 and January 2012 the company also sold $350 million in perpetual bonds. Perpetuals, or bonds with no maturity, offer the company more flexibility. For a company such as ICTSI, which has concessions for 20 to 30 years, having long-term capital is attractive.

"The attractiveness of a perpetual is [that] it has great financial flexibility," said O'Neil. "We invest a lot of capital in developing new assets which typically do take some time to ramp up to full cash flow. Unlike fixed maturity debt, for a perpetual you can suspend a coupon or rollover your debt, though admittedly that comes at a cost," he said.

ICTSI is unrated but this could change in the future, now that the Philippines has acquired an investment grade credit rating. "Historically, the issue for Philippine companies is that as long as the country is not rated investment grade, there is very little benefit for companies to get rated as it is hard to pierce the sovereign ceiling," said O'Neil. "But with the country on the upgrade, that could change in the future," he said.

Getting a rating would help the company to widen its investor base and potentially attract more buy-and-hold investors. "We currently have about $900 million of public debt outstanding, and as we continue to grow if we were to increase our total public debt to levels of $2 to $3 billion, then that access to a broader investor base could become beneficial," said O'Neil.

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