WEEKLY STOCK COMMENT: PORT OF TAURANGA
Roy Davidson, 11 October 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 and Christchurch), 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 40 New Zealand cargo owners across a range of sectors. In mid-2014, Kotahi committed to provide up to 1.8 million export containers to POT and up to 2.5 million containers to Maersk Line over 10 years. These two commitments from Kotahi enabled the POT to invest in the infrastructure (e.g. dredging, container cranes) to allow visits from larger ships. In late 2016, the maiden visit of Maersk’s 9,500 TEU capacity ship commenced the regular visits of large TEU ships into the POT.
The introduction of the capability of large ships at POT alongside the acquisition of 50% of PrimePort Timaru in mid-2013 have both contributed to the increased success of the POTs hub and feeder model. Transshipment containers, where containers are distributed from one service to another at Tauranga now makes up around a quarter of POTs total TEU. 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 has delivered several strong results recently, driven by a steady increase in log volumes and a growth in transshipped containers. We expect container volumes, in particular, to trend upwards in the coming years due to an increase in larger ship visits, and transshipments. POT recently announced its intention to review its payout policy and capital structure given gearing levels have hardly moved since the special distributions were introduced. It is possible that the annual special distribution of 5cps will remain or there could be a lift in the payout. While we continue to have confidence in the company’s future ability to generate above-market container growth over the long-term, we remain concerned 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 continue to positively impact earnings from here on in. 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.
Potential risks to POT include:
- higher interest rates
- competitor investment
- trade slowdown