ICTSI chief may be set to focus more on leisure than the old family business

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“Enrique Razon doesn’t gamble and says he feels more comfortable operating a port crane than he does glad-handing a crowd of high-rollers,” Bloomberg wrote in November 2013.

Mr Razon, worth an estimated at $4.7bn, according to Forbes, may not be into gambling; nonetheless, there is reason to believe he must be unimpressed by the poor performance on the stock market of one of his core holdings – International Container Terminal Services Inc (ICTSI), the Manila-headquartered ports operator – over the last couple of years. He is chairman and chief executive of ICTSI, a business that has been controlled by his family for decades.

As the billionaire pushes for ambitious plans in the leisure sector with Bloomberry Resorts Corp, another core holding, one may speculate that it could be a great time to trim his stake in ICTSI, whose assets look fairly priced, based on their net worth, and pay a lowly forward yield of 1.1%.

ICTSI’s share price has been looking for direction since 2013. After an impressive rally between 2010 and early 2013, the stock is now closer to its 52-week low than to its 52-week high, and still hovers around the level it recorded a couple of years ago – its relative valuation at 28x and 23x net earnings for 2015 and 2016, respectively, points to more downside than upside in the next few quarters.

One reason for that is that it has five greenfield projects on the go which require large investments upfront before they are revenue-generating.

Trading multiples based on adjusted operating cash flow and book value similarly signal a stock that has become increasingly expensive, in spite of strong fundamentals, as first-quarter results recently showed.

One obvious question is whether Mr Razon has taken his eye off the ball to pursue fortunes elsewhere in the international markets. If that’s the case, consider that on the stock exchange the situation is even more critical with Bloomberry, which set a new 52-week low last Thursday.

Is it time for a change?

It’s highly unlikely that Mr Razon will opt out of a family business hew helped to grow over the past two decades – unless, that is, he seriously needs the cash to fund his $1bn resort and gambling dream in South Korea. Still, he might wonder how much growth is left in ICTSI, which operates 29 facilities worldwide, and has been expanding internationally by acquiring strategic stake in terminals for years now.

Growth, in fact, plays a very important role at ICTSI, which announced last week the bolt-on acquisition of Mexico’s Terminal Maritima de Tuxpan for $54.5m. Growth, however, is not necessarily going to boost shareholder value at ICT.

The Mexican deal will be completed once anti-trust approval is granted, and after a concession agreement is amended, ICTSI said, adding that Terminal Maritima has a concession to build and operate a maritime container terminal in Port Tuxpan and is the owner of the real estate where the container terminal will be built.

“The rationale for the transaction is to continue to expand the business and diversify geographically, and to support, participate in, and benefit from the positive economic development in Mexico,” the company noted.

This is part of a broader strategy aimed at consolidating assets around the world, while divesting non-core operations. In early 2015, ICTSI took full control of the Melbourne port project, but it also sold a 60%-owned subsidiary in Japan, which ran the Naha International Container Terminal.

Its head of investor relations, Arthur Tabuena, told The Loadstar today that Africa remained ICT’s favoured investment destination.

Its financial strategy is similarly important. ICT believes that de-leveraging is important, and there were signs that its capital structure has become more efficient earlier this year, when it redeemed debt and cut interest payments by securing new debt obligations at a cheaper rate, while raising more funds to pursue growth. Mr Tabuena added that de-leveraging would occur as its Capex comes down as its under-construction projects near completion.

Going with consensus estimates, analysts expect a steep growth rate for revenues, for an implied compound annual growth rate of 15.5% between 2012 and 2017, which should outstrip the CAGR of earnings, as core margins are expected to plateau over the period. Then, managing expectations will become as important as fundamentals and M&A strategy – that’s particularly true with regard to Mr Razon’s future plans.