Santos Brasil Rally Defies Competition Threat: Corporate Brazil

Investors in Santos Brasil Participacoes SA, Brazil’s biggest port operator, are shrugging off concern a government push to boost competition will pare profit margins that are twice the industry average.

The company has gained 5.2 percent since Brazil announced Dec. 6 it would privatize terminals at 20 ports. That compares with a 0.1 percent drop for the benchmark Bovespa index and a

0.7 percent decline for Wilson Sons Ltd., Brazil’s only other publicly traded operator. Santos Brasil slid 0.3 percent yesterday to 31 reais as workers prepared a half-day strike over the privatization. The stock closed unchanged at 31 reais today in Sao Paulo.

Santos Brasil, which says it handles 20 percent of all container shipments in and out of Brazil, will have an advantage over rivals as President Dilma Rousseff makes an unprecedented push to open the port industry to private investors, according to Henrique Kleine, an analyst at Magliano SA Corretora de Cambio & Valores Mobiliarios. The government expects 54.2 billion reais ($27.6 billion) in port investments through 2017.

“Until the competition has the same scale, the same technology, the same space, it will take time,” Kleine, who rates the stock a buy, said in a telephone interview from Sao Paulo. “Until this happens the preference for the market is who is already working.”

Santos Port’s terminals will be among the first of 159 terminals slated for auction, the ports secretary said late yesterday in a statement on its website.

Operating Profit

Santos Brasil, which runs more than half the terminals at the publicly owned Santos Port about 80 kilometers (49 miles) from Sao Paulo, earned $33 in operating profit for every $100 in revenue in the 12 months through the third quarter. That’s about twice the average 17 percent operating margin of 156 global logistics peers with a market value above $1 billion, data compiled by Bloomberg show.

The stock trades at 14 times its estimated 2013 earnings, less than the average of 21 for logistics companies worldwide. Of the 16 analysts who rate the company, eight say buy, seven recommend holding and one rates it a sell.

Rousseff’s government last year pushed banks to cut rates on loans, utilities to reduce power bills and phone companies to charge less for wireless plans as she seeks to curtail inflation and spur the economy. Santos Brasil plunged 14 percent in September, its biggest monthly drop in a year, on concern the plan to fuel competition and cut costs would be more severe.

Brazilian ports have some of the longest turnaround times in the world, with shipping costs twice those of the U.S., said Sergio Mendes, head of the grain exporters’ association.

China, India Ports

China and India have invested billions of dollars expanding and modernizing their ports, said Ed Sands, global practice leader of logistics at Procurian, a procurement management firm based in King of Prussia, Pennsylvania.

“Brazil still today trails those competing economies,” Sands said in a telephone interview. Brazilian ports rank 130th out of 144 countries, according to the World Economic Forum. “Having world class ports and channel depths is key to success.”

Union workers at the Santos port will walk off the job for six hours on Feb. 22, said Paulo Pereira da Silva, federal deputy and president of the Forca Sindical labor federation. A work stoppage would cost Santos Brasil as much as 4 million reais in lost revenue a day, said Mauro Salgado, chief commercial officer at Santos Brasil.

Government Concessions

Brazil’s government won’t accept changing rules that will hurt the goal of introducing more port competition, Chief of Staff Gleisi Hoffman said in a telephone interview on Feb. 14. The ports special secretary for the president didn’t respond to a telephone call or e-mail seeking comments yesterday.

The government “may make some concessions but they won’t change the essence of what they are going to do,” said Jefferson Finch, an analyst at political risk consulting firm Eurasia Group in New York. “Letting the infrastructure agenda fail would be more detrimental to Dilma’s re-election chances than labor in the ports.”

Santos Brasil will use ship workers to fill in for striking stevedores if necessary, Salgado said in an interview in Sao Paulo.

As the industry leader, Santos Brasil stands to lose the most market share from government plans to privatize terminals and ease bottlenecks that are stunting economic growth. Santos Brasil’s contract for the port expires in 2022. There’s an option to extend the concession for an additional 25 years.

Market Share

The plan “could lower prices and kill public ports and the investments we made in those ports,” Salgado said, adding that government regulations requiring public ports to hire only unionized workers will put it at a disadvantage.

Geneva-based Mediterranean Shipping Company and AP Moeller Maersk A/S, based in Copenhagen, are opening a terminal at Santos Port this year, and are expected to take market share from Santos Brasil, Sami Karlik and Rodrigo Olivares, analysts at Votorantim Corretora, said in a report late last year. They estimated Santos Brasil’s 2014 volume could be 13 percent below 2013 figures. The Votorantim analysts didn’t respond to a request for comment.

In the short term, the new framework isn’t likely to hurt Santos Brasil, which has a head start over the competition, said Magliano’s Kleine.

“They can start to take market share, but not immediately,” he said. “For now, this advantage is still big for Santos Brasil.”