PIL eyes growth with Asia and Africa rebound

Second generation leader SS Teo is talking up the post-pandemic trade recovery in Asia and Africa and wants to improve earnings to lift a debt-laden balance sheet. However, doubts persist as to whether PIL can achieve this goal because any volume surges from these trades may well come too little, too late if the pandemic persists or worsens.

News ID: 80494

Date: 18 April 2020 - 10:18

‘Emerging economies need to balance health and safety concerns with sustaining livelihoods,’ SS Teo remarked, adding that this would support a gradual easing of lockdown restrictions and a rebound in business and trade activities.

PACIFIC International Lines is betting on trade volumes between the emerging economies of Asia and Africa staging a faster rebound from the drastic downturn brought on by the coronavirus pandemic, compared with those for the transpacific and Asia-Europe trades.

SS Teo, the family owned PIL’s second generation leader, told Lloyd’s List that even during the peak of the outbreak in China, cargoes continued to move through the country’s International Land Sea Trade Corridor that connects western China to the rest of the world.

Before the outbreak, PIL had developed land-sea services on this trade corridor linking the world’s second-largest economy to Africa, Southeast Asia and Central Asia via Qinzhou port in Guangxi and Lanzhou in Gansu.

While China now seems to have contained the outbreak and many of its factories have resumed production in March, exports from the country were seen expanding 60% during the same month over February liftings.

Mr Teo highlighted an “upward trend” this month in the outbound volume via ILSTC, with main exports including automobile spare parts, machinery and motorcycles to Africa, and construction materials and chemicals to Southeast Asia and South Asia.

He considered these as signs that this multi-modal corridor is gaining traction as an alternative to sea trade with China via its key ports and the Yangtze River.

The volumes are still small, but this is one new trade route through which PIL seeks to tap an expected growth in cargo flows between Asia and Africa.

He cited a 9% expansion in the volumes PIL shipped from Asia to West Africa and another 22% growth in its West Africa shipments to the Far East last year.

By his estimate, PIL commands a 16% market share over the Asia-Africa trade, which he believes puts the Singapore-based shipping group on a good footing to gain from the volume surge in this trade between these growing regions when they snap out of the coronavirus-led disruption.

“Emerging economies need to balance health and safety concerns with sustaining livelihoods,” he remarked.

Noting that Vietnam has already resumed exporting rice, he expects other countries in Asia and Africa to “gradually ease lockdown restrictions and make away for some factories and service providers to resume operation”.

However, Asia-Africa volumes are nowhere close to matching those on the largest East-West trades.

To back this argument up, one analyst, speaking at a recent BIMCO webinar, described the trade relating to Africa as “insignificant”. The analyst also warned that PIL faces tougher challenges in defending its position against larger shipping lines, such as MSC, which has already moved in to capitalise on this emerging market.

Takeover target

Alphaliner founding principal consultant Tan Hua Joo offers a slightly different take.

“PIL is seen as the Asian carrier with the largest market share of African trades — this is what makes it attractive as an acquisition target.”

Mr Tan stopped short of naming China’s state-owned group Cosco, which has long been rumoured as a highly potential suitor.

Other observers have suggested that in this respect, the similar culture it shares with PIL — a business run by a Chinese family — would have supported Cosco’s acquisition interest.

PIL’s Mr Teo has repeatedly denied any truth in the market chatter that PIL is for sale.

Putting this aside, there is no denying PIL has a smaller footprint in Africa compared with MSC and two other bigger operators, Maersk and CMA CGM.

Mr Teo argued, however, that agility can outweigh size as a competitive advantage when it comes to serving trades in Africa or two other fast-growing regions, Asia and Latin America, given that ports there may not accommodate large containerships.

Still, Alphaliner’s Mr Tan pointed to one larger concern pertaining to PIL’s bet on the growth of certain emerging trades.

“The African continent — and especially countries in West Africa — are hit by both the coronavirus outbreak and the oil price crash.”

PIL has also said that it will focus on Asia-Red Sea and Middle East-Red Sea trades.

International bodies have forewarned that the coronavirus outbreak and the economic disruption that is ensuing may worsen in Africa and the Middle East in the coming months.

African countries, including Cameroon, have nonetheless drawn on the lessons learnt from their previous battle against the ebola contagion in their efforts to contain the coronavirus contagion.

Mr Teo takes a contrarian view on West Africa’s oil exposure.

“Resource-rich countries such as Nigeria have diversified their economies away from oil since 2016 and are better-placed to weather the current oil price crash,” he argued.

Even if that argument is accurate, the International Monetary Fund has already warned this week that the world heading into the worst-ever global recession since Great Depression.

This will not bode well for container shipping demand.

Reducing loans

Mr Tan foresees a broad-sector fall in earnings this year, which would complicate PIL’s bid to improve its financial standing.

PIL has guided that its gearing — defined as net debt to earnings before interest, tax, depreciation and amortisation — would have come off to seven times on completing divestments done over the past 16 months.

These include the sale of over a dozen of vessels including seven 12,000-teu boxships, factories run by its Hong Kong-listed subsidiary, Singamas, and its stake in Pacific Direct Line.

Setting out the plans, Mr Teo said: “We target to further lower this to five times over the next two to three years by lowering debt and improving our ebitda.”

PIL posted $238m in ebitda for the first half of last year, up from $84m for the year-ago period, Alphaliner noted, drawing on financial statements that were released on Monday and Tuesday.

Full year ebitda for 2018 came up to $200m.

Including financial leases but excluding amounts due to related companies, its total financial debt stood at $3.86bn as of June 30 last year, with about a third of these due within one year, according to Alphaliner.

PIL exited the transpacific in March and Europe trades early last year.