WEEKLY STOCK COMMENT: PORT OF TAURANGA
Roy Davidson, 3 May 2018
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.
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 delivered an 8% increase in profit at its FY17 result, driven by a rebound in log volumes (+20%) and growth in containers with the company continuing to take import volume from Auckland. We expect container volumes to steadily grow in the coming years due to larger ship visits, and increased transshipments. While POT has plenty of capacity for growth with its current property assets, the key will be how quickly the company can continue to grow in order to justify a relatively full valuation at present. We continue to have confidence in the company’s future ability to generate above-market container growth over the long-term. However, we remain concerned in regard to the economic irrationality of sector peers continuing to slow the pace of volume growth and damage margin.
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.
Risks for POT include 1) higher interest rates, 2) regulatory change, and 3) economic downturn.