New Zealand Professional Investment Services Firm

Forsyth Barr

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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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Napier Port<br>Another Log in the Wall... for the Time Being</h2>
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<p><strong>UNDERPERFORM</strong></p>
<p>Napier Port (NPH) reported robust 4Q21 volumes which suggests its FY21 EBITDA guidance is even more conservative than 3Q21 earnings implied. We raise our near term earnings forecasts as a result, above the guidance band, but caution that earnings growth over the medium term will be constrained despite the likely further growth in log exports from the 'wall of wood' and the return of cruise. Incremental costs (depreciation and interest) from 6 Wharf's commissioning, due late FY22/early FY23, will limit further profit gains.​​​​​​​ Trading at ~15x EV/EBITDA, NPH has de-rated in recent months along with other infrastructure stocks, yet with its dividend yield spread (to bond rates) narrowing we believe further downside risk persists. UNDERPERFORM.&nbsp;</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY21 lifted following&nbsp;4Q21 trade volume update; FY22 largely unchanged; FY23 lifted due to higher log export volumes.&nbsp;</li>
<li><strong>Target price</strong>:&nbsp;Lowered to NZ$2.90 from NZ$3.05 given the reductions to our long term log export assumptions as&nbsp;Hawkes&nbsp;Bay harvesting activity slows the other side of the 'wall-of-wood'.&nbsp;</li>
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<h3>Heavily reliant on forestry</h3>
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<p>Forestry is NPH's most important trade, accounting for ~43% of revenue. The majority of timber related volumes are in log exports, however, it also exports containerised wood pulp and sawn timber. Its exposure to forestry has increased in recent years given the maturing forests of the 1990s planting boom. We expect volumes to increase over the medium term but fall over the longer term.&nbsp;</p>
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<h3>Out of region potential limited by economics of supply chain</h3>
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<p>At the NPH investor day in June 2021 management outlined its objective in securing more out of region log exports and suggested that export volumes could rise substantially from current levels. While we accept this provides scope for volume growth, the commercial levers at the port to incentivise out of region log exporters is limited. Inland transport costs typically range from NZ$15–NZ$30/T per 100km, yet NPH generates on average revenue of only&nbsp; ~NZ$10/T. Therefore, we assume only modest out of region logs to continue to be exported via NPH.&nbsp;</p>
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<h3>Our revised forecasts lift the peak</h3>
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<p>Applying the&nbsp;recently published MPI log availability forecasts for&nbsp;Hawkes&nbsp;Bay we update our log export estimates for NPH. Our revised peak log export forecast&nbsp;of ~3.4mT occurs in FY26&nbsp;before falling to ~1.8mT in FY30. Our peak estimate is below management's suggested unconstrained peak throughput of &gt;4mT through the 'wall of wood', to reflect likely early and deferred harvesting to flatten the harvest profile to manage industry operational constraints.&nbsp;</p>
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Napier Port Another Log in the Wall... for the Time Being

UNDERPERFORM
Napier Port (NPH) reported robust 4Q21 volumes which suggests its FY21 EBITDA guidance is even more conservative than 3Q21 earnings implied. We raise our near term earnings forecasts as a result, above the guidance band, but caution that earnings growth over the medium term will be constrained despite the likely further growth in log exports from the 'wall of wood' and the return of cruise. Incremental costs (depreciation and interest) from 6 Wharf's commissioning, due late FY22/early FY23, will limit further profit gains.​​​​​​​ Trading at ~15x EV/EBITDA, NPH has de-rated in recent months along with other infrastructure stocks, yet with its dividend yield spread (to bond rates) narrowing we believe further downside risk persists. UNDERPERFORM.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;FY21 lifted following&nbsp;4Q21 trade volume update; FY22 largely unchanged; FY23 lifted due to higher log export volumes.&nbsp;
Target price:&nbsp;Lowered to NZ$2.90 from NZ$3.05 given the reductions to our long term log export assumptions as&nbsp;Hawkes&nbsp;Bay harvesting activity slows the other side of the 'wall-of-wood'.&nbsp;



Heavily reliant on forestry


Forestry is NPH's most important trade, accounting for ~43% of revenue. The majority of timber related volumes are in log exports, however, it also exports containerised wood pulp and sawn timber. Its exposure to forestry has increased in recent years given the maturing forests of the 1990s planting boom. We expect volumes to increase over the medium term but fall over the longer term.&nbsp;


Out of region potential limited by economics of supply chain


At the NPH investor day in June 2021 management outlined its objective in securing more out of region log exports and suggested that export volumes could rise substantially from current levels. While we accept this provides scope for volume growth, the commercial levers at the port to incentivise out of region log exporters is limited. Inland transport costs typically range from NZ$15–NZ$30/T per 100km, yet NPH generates on average revenue of only&nbsp; ~NZ$10/T. Therefore, we assume only modest out of region logs to continue to be exported via NPH.&nbsp;


Our revised forecasts lift the peak


Applying the&nbsp;recently published MPI log availability forecasts for&nbsp;Hawkes&nbsp;Bay we update our log export estimates for NPH. Our revised peak log export forecast&nbsp;of ~3.4mT occurs in FY26&nbsp;before falling to ~1.8mT in FY30. Our peak estimate is below management's suggested unconstrained peak throughput of &gt;4mT through the 'wall of wood', to reflect likely early and deferred harvesting to flatten the harvest profile to manage industry operational constraints.&nbsp;


Napier Port: Another Log in the Wall... For the Time Being