INSIGHTS

WEEKLY COMPANY INSIGHT: PORT OF TAURANGA

Roy Davidson, 11 July 2019

POT110719 

Description

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.

Investments in infrastructure pave the way for larger ships

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 POT to invest in the infrastructure (e.g. dredging, container cranes) to allow visits from larger ships.

POT’s international hub port strategy

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 POT's hub and feeder model. Transshipment containers, where containers are distributed from one service to another at Tauranga now makes up around 30% of POTs total containers. 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.

Growing volumes the feature of the latest results

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 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 may remain in some shape or form, alternatively there could be a lift in the annual 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 with noncommercial behaviour of some sector peers.

POT remains an excellent long-term investment

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 slowly beginning to show benefits. 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.

Risks

  1. higher interest rates
  2. competitor investment
  3. trade slowdown
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