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

<h2>Port of Tauranga</h2>

FY19 — Coda’ve Been More
Port of Tauranga’s (POT) FY19 earnings were in-line with market expectations, but of higher quality. While port profitability was strong, group returns were dragged down by losses at JV Coda. Underlying cargo growth has remained above trend for the third successive year, though will slow in FY20 given log export market issues. A lack of operating leverage has been a feature historically, though there is a glimmer of hope in the FY19 result with some core port margin expansion evident. Nonetheless, on a go-forward basis sustainable earnings growth is closer to mid-single digits than double digits and therefore we are still unable to justify current relative valuation levels (~25x EV/EBITDA; ~39x PE) despite the lower bond rate environment. We, hence, retain an UNDERPERFORM rating.
What’s changed?
<ul>
<li>Earnings: Minor immaterial adjustments</li>
<li>Target Price:&nbsp;Increased to NZ$5.25 from NZ$4.80 to reflect a lower WACC assumption given risk free rate compression and POT’s improved credit rating</li>
</ul>
Cargo growth to slow
Three years of synchronised cargo growth will likely come to an end in FY20. Log market pressures from lower export prices will temper log exports, despite very strong volumes through July and August. Container growth will continue but is subject to increased competitive tension with Ports of Auckland, as it completes its automation project. In the meantime, POT is being seemingly more aggressive in its approach to pricing than it has been for some time. This may help explain the operating leverage evident in FY19.&nbsp;
Bad year for Coda
JV Coda had a shocker. On a normalised basis it incurred a loss due to entering loss-making contracts, which were exacerbated in an accounting sense by a number of one-off write-offs. POT is confident of returning Coda to profitability in FY20 under new management. Other associate/JV investments were far less eventful. Northport, the largest, experienced a -2% decline in NPAT due to softer log export volumes.
Special dividend to continue but at a lower level
Excess imputation credits and balance sheet capacity has allowed POT to extend its capital management programme for a further four years, though at a lower level of special dividend (2.5c each year compared to 5.0c for the past four years). POT’s balance sheet and business outlook has been rewarded by S&amp;P raising its credit rating to A- which will assist financing costs in future.
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Investment View
POT has historically traded at a material premium to the market. We expect this to continue given its high returns, longer-term growth outlook, strong management team and operational capability. However, the rate of future profit growth is modest through the cycle rather than strong. With the share price more than factoring in the positives, including potential structural changes in light of the Upper North Island logistics and freight review, our rating is UNDERPERFORM.
</div>
&nbsp;Andy Bowley
andy.bowley@forsythbarr.co.nz
+64 4 495 8246

Port of Tauranga

FY19 — Coda’ve Been More
Port of Tauranga’s (POT) FY19 earnings were in-line with market expectations, but of higher quality. While port profitability was strong, group returns were dragged down by losses at JV Coda. Underlying cargo growth has remained above trend for the third successive year, though will slow in FY20 given log export market issues. A lack of operating leverage has been a feature historically, though there is a glimmer of hope in the FY19 result with some core port margin expansion evident. Nonetheless, on a go-forward basis sustainable earnings growth is closer to mid-single digits than double digits and therefore we are still unable to justify current relative valuation levels (~25x EV/EBITDA; ~39x PE) despite the lower bond rate environment. We, hence, retain an UNDERPERFORM rating.
What’s changed?

Earnings: Minor immaterial adjustments
Target Price:&nbsp;Increased to NZ$5.25 from NZ$4.80 to reflect a lower WACC assumption given risk free rate compression and POT’s improved credit rating

Cargo growth to slow
Three years of synchronised cargo growth will likely come to an end in FY20. Log market pressures from lower export prices will temper log exports, despite very strong volumes through July and August. Container growth will continue but is subject to increased competitive tension with Ports of Auckland, as it completes its automation project. In the meantime, POT is being seemingly more aggressive in its approach to pricing than it has been for some time. This may help explain the operating leverage evident in FY19.&nbsp;
Bad year for Coda
JV Coda had a shocker. On a normalised basis it incurred a loss due to entering loss-making contracts, which were exacerbated in an accounting sense by a number of one-off write-offs. POT is confident of returning Coda to profitability in FY20 under new management. Other associate/JV investments were far less eventful. Northport, the largest, experienced a -2% decline in NPAT due to softer log export volumes.
Special dividend to continue but at a lower level
Excess imputation credits and balance sheet capacity has allowed POT to extend its capital management programme for a further four years, though at a lower level of special dividend (2.5c each year compared to 5.0c for the past four years). POT’s balance sheet and business outlook has been rewarded by S&amp;P raising its credit rating to A- which will assist financing costs in future.

Investment View
POT has historically traded at a material premium to the market. We expect this to continue given its high returns, longer-term growth outlook, strong management team and operational capability. However, the rate of future profit growth is modest through the cycle rather than strong. With the share price more than factoring in the positives, including potential structural changes in light of the Upper North Island logistics and freight review, our rating is UNDERPERFORM.

&nbsp;Andy Bowley
andy.bowley@forsythbarr.co.nz
+64 4 495 8246

Port of Tauranga: FY19 — Coda’ve Been More