New Zealand Professional Investment Services Firm

Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Port of Tauranga</h2>
FY19 Preview —&nbsp;Capital Management to Continue
Port of Tauranga (POT) will report its FY19 result on Wednesday 28 August 2019; we expect a third consecutive year of robust volume growth (+7%) translating to modest (+6%) full year NPAT growth. Our forecasts are consistent with management NPAT guidance: “the upper end of the previous guidance of NZ$96m–NZ$101m”.&nbsp;
Key issues to consider at POT’s FY19 result
<ul>
<li>Above trend trade growth:&nbsp;Cargo growth of +9% in 1H19 is likely to have slowed through 2H19, but will remain at an elevated level above the long term growth rate of +5%. More specifically, log exports have grown +12% in FY19 according to NZ Stats data and containers are up +5% in TEU terms, based on Ministry of Transport data. Growth will likely slow into FY20, not least given the slowdown in forestry harvesting due to weaker export log prices.</li>
<li>Lacking operating leverage: POT has achieved consistent profit growth in recent years helped by resurgent cargo growth. However, it has been unable to generate any operating leverage (margin expansion). We think this reflects the lower margin nature of incremental cargo, in particular container transhipments and MetroPort related containers.</li>
<li>Associates and JVs:&nbsp;Coda was a key disappointment in 1H19 (prior year audit adjustment and weak operational execution) and together with Northport (-7% decline in log volumes for the year) and Timaru Container Terminal (softer container volumes), will contribute to a material decline in associate income in the year, on our estimates.</li>
<li>Capital management potential: POT’s existing four year capital management programme, which has added a 5c special dividend onto each final dividend, ends in FY19. In light of balance sheet capacity we expect the programme to be extended for at least for another two years. This should support an otherwise depressed dividend yield (cash yield with the special is ~3%).</li>
</ul>
Figure 1. Forecast summary (NZ$m)
<table class="table table-striped">
<thead>
<tr>
<td>
&nbsp;
</td>
<td>
FY18
</td>
<td>
FY19
</td>
<td>
Change
</td>
<td>
Consensus
</td>
</tr>
</thead>
<tbody>
<tr>
<td>
Sales revenue
</td>
<td>
283.2
</td>
<td>
305.5
</td>
<td>
7.9%
</td>
<td>
306.5
</td>
</tr>
<tr>
<td>
EBITDA
</td>
<td>
154.1
</td>
<td>
170.2
</td>
<td>
10.4%
</td>
<td>
172.1
</td>
</tr>
<tr>
<td>
Associates
</td>
<td>
15.1
</td>
<td>
11.0
</td>
<td>
-27.3%
</td>
<td>
n/a
</td>
</tr>
<tr>
<td>
Reported NPAT
</td>
<td>
94.3
</td>
<td>
100.4
</td>
<td>
6.6%
</td>
<td>
100.6
</td>
</tr>
<tr>
<td>
Underlying NPAT
</td>
<td>
95.1
</td>
<td>
100.4
</td>
<td>
5.7%
</td>
<td>
100.6
</td>
</tr>
<tr>
<td>
Underlying EPS (cents)
</td>
<td>
14.0
</td>
<td>
14.8
</td>
<td>
5.7%
</td>
<td>
14.8
</td>
</tr>
<tr>
<td>
Final DPS (cents)
</td>
<td>
7.0
</td>
<td>
7.5
</td>
<td>
7.1%
</td>
<td>
n/a
</td>
</tr>
<tr>
<td>
Special DPS (cents)
</td>
<td>
5.0
</td>
<td>
5.0
</td>
<td>
0.0%
</td>
<td>
n/a
</td>
</tr>
</tbody>
</table>
&nbsp;Source: Eikon, Forsyth Barr analysis
<div class="content-highlight">
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>
Andy Bowley
andy.bowley@forsythbarr.co.nz
+64 4 495 8246

Port of Tauranga
FY19 Preview —&nbsp;Capital Management to Continue
Port of Tauranga (POT) will report its FY19 result on Wednesday 28 August 2019; we expect a third consecutive year of robust volume growth (+7%) translating to modest (+6%) full year NPAT growth. Our forecasts are consistent with management NPAT guidance: “the upper end of the previous guidance of NZ$96m–NZ$101m”.&nbsp;
Key issues to consider at POT’s FY19 result

Above trend trade growth:&nbsp;Cargo growth of +9% in 1H19 is likely to have slowed through 2H19, but will remain at an elevated level above the long term growth rate of +5%. More specifically, log exports have grown +12% in FY19 according to NZ Stats data and containers are up +5% in TEU terms, based on Ministry of Transport data. Growth will likely slow into FY20, not least given the slowdown in forestry harvesting due to weaker export log prices.
Lacking operating leverage: POT has achieved consistent profit growth in recent years helped by resurgent cargo growth. However, it has been unable to generate any operating leverage (margin expansion). We think this reflects the lower margin nature of incremental cargo, in particular container transhipments and MetroPort related containers.
Associates and JVs:&nbsp;Coda was a key disappointment in 1H19 (prior year audit adjustment and weak operational execution) and together with Northport (-7% decline in log volumes for the year) and Timaru Container Terminal (softer container volumes), will contribute to a material decline in associate income in the year, on our estimates.
Capital management potential: POT’s existing four year capital management programme, which has added a 5c special dividend onto each final dividend, ends in FY19. In light of balance sheet capacity we expect the programme to be extended for at least for another two years. This should support an otherwise depressed dividend yield (cash yield with the special is ~3%).

Figure 1. Forecast summary (NZ$m)




&nbsp;


FY18


FY19


Change


Consensus






Sales revenue


283.2


305.5


7.9%


306.5




EBITDA


154.1


170.2


10.4%


172.1




Associates


15.1


11.0


-27.3%


n/a




Reported NPAT


94.3


100.4


6.6%


100.6




Underlying NPAT


95.1


100.4


5.7%


100.6




Underlying EPS (cents)


14.0


14.8


5.7%


14.8




Final DPS (cents)


7.0


7.5


7.1%


n/a




Special DPS (cents)


5.0


5.0


0.0%


n/a




&nbsp;Source: Eikon, Forsyth Barr analysis

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.

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

Port of Tauranga:  FY19 Preview — Capital Management to Continue