INSIGHTS

WEEKLY STOCK COMMENT: PORT OF TAURANGA (POT)

Roy Davidson , 2 February 2017

Port of Tauranga (POT) is New Zealand’s principal export port and the country’s largest port by volume and land area. It has a natural log trade monopoly servicing central North Island forests. POT’s other major trade items include forest products, coal, petroleum, fertiliser and primary products (such as dairy and kiwifruit). POT also engages in several freight handling and logistics activities (MetroPort in Auckland), forestry services including marshalling and has 50% stakes in Northport in Whangarei and PrimePort Timaru.

Overview

Kotahi is a joint venture between Fonterra and Silver Fern Farms that provides freight management services for more than 30 New Zealand cargo owners across a range of sectors. Kotahi is committing up to 1.8 million export containers to POT over the next ten years. Kotahi will also commit to provide up to 2.5 million containers to Maersk Line over the next ten years. These two commitments from Kotahi sit at the heart of the opportunity for Maersk and POT to work together to bring big ships (that can carry 9,500 containers as opposed to the current 4,500) into New Zealand for the first time. As part of the overall arrangements, POT has invested in the infrastructure (e.g. dredging, container cranes) to enable visits from the larger ships.

In August 2013, POT announced the acquisition of 50% of PrimePort Timaru. While POT has opportunities to leverage its relationships to increase ship calls into Timaru, over time one of the key opportunities would involve promoting consolidation of volumes out of Timaru to Tauranga as a hub-port, using coastal shipping. Timaru is well positioned for the growth of the South Island dairy trade and Fonterra, through its Kotahi initiative, would be a key potential customer.

POT’s FY16 result was below expectations, with net profit after tax falling 2% to $77.3m. This was driven by an 18% decline in log volumes as Chinese demand remains subdued. However, this was broadly offset by the rest of the business, with container volumes growing strongly, albeit at lower margin, on the back of increased dairy volumes from Kotahi. POT announced a final dividend of 6cps as well as a special dividend of 5cps, the beginning of a four year, $140m capital return programme following the capital expenditure required to bring the larger ships into the port.

POT is a core long-term infrastructure holding. Its strategic stakes in other infrastructure assets such as Northport, PrimePort Timaru and other logistics activities are showing benefits, while POT’s investment to allow the visitation of larger ships to the port, will positively impact earnings from 2017 onwards. POT’s extensive land bank, operational efficiency, excellent transport connections (road and rail), balance sheet strength and management expertise also provide significant capacity for future growth. POT is rarely cheap, so look to add on weakness.

Risks to POT include; 1) economic downturn, 2) increased competition, and 3) reduced export volumes.