New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Napier Port 1H22 — Inflation on Both Sides of the Ledger

NEUTRAL
Napier Port's (NPH) 1H22 result highlighted the benefits of price inflation but the contraints&nbsp;of cost inflation. In the midst of this inflationary environment, lower volumes dragged down profitability. The second half volume outlook appears more favourable with some catch-up of the first half short fall in containers, which should mean year-on-year profit growth through 2H22, irrespective of the retained (and we consider conservative) FY22 earnings guidance. NPH trades at ~24x one year forward PE,&nbsp; a ~-30% discount to sector peer, Port of&nbsp;Tauranga&nbsp;(POT).&nbsp;We expect&nbsp; this discount to widen as&nbsp;NPH's&nbsp;earnings recovery takes hold through FY23 and the longer term growth differentials between the two ports is more widely accepted. NEUTRAL.&nbsp;&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;Modest upgrades across our outlook period to recognise medium term&nbsp;pricing gains and a small lift in container volumes
Target price:&nbsp;Raised to NZ$2.75&nbsp;from NZ$2.55



Powerful price inflation&nbsp;


NPH's&nbsp;aggressive approach to pricing has helped partially shield profitability from the significant volume decline in 1H22 and surging costs. Its infrastructure levy changes in October 2021 (increase for containers and new levy for bulk), together with its annual general rate increases, helped drive average underlying revenue per unit (ARPU) up +16% for containers and +8% for bulk. Management has also initiated a new fuel adjustment factor that will insulate it from fuel prices in excess of its FY21 average from May 2022.&nbsp;


Trade volumes to improve through 2H22


Following a -10% dip in 1H22 trade volumes, management expects a partial rebound in 2H22 from late season exports in horticulture, meat and forestry. It also suggests that the shipping service changes (Maersk's OC1 Trident service withdrawn, replaced by a new but less frequent ZIM trans-Tasman service) will have no meaningful impact on volumes, implying and notwithstanding ongoing container shipping disruption, a bounce back to more normalised volumes in FY23.&nbsp;


Constraining cost inflation&nbsp;


Cost pressures were a key feature in 1H22 with opex up +9% despite the material volume decline. We estimate that NPH's cost base is ~80% fixed, the operating leverage from which exacerbated the margin impact in 1H22 but should assist in 2H22 and FY23. We expect cost inflation to remain a challenge through 2H22 before moderating in FY23. In contrast, capex costs have been largely insulated to-date. 6 Wharf remains on budget with NPH now in the final stages of the project ahead of commissioning.&nbsp;


Napier Port: 1H22 — Inflation on Both Sides of the Ledger