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<br>FY21&nbsp;—&nbsp;Earnings in Storage&nbsp;</h2>
<div></div>
<p><strong>UNDERPERFORM</strong></p>
<p>Port of&nbsp;Tauranga&nbsp;(POT) reported a strong FY21 result, ahead of expectations and management guidance, driven by a step-up in second half on-port container storage revenues. The port is navigating global and local congestion well and has more than offset operational challenges and a rising cost base with pricing moves, particularly for container storage. While the year ahead should benefit further from congestion related storage income, resulting in likely consensus earnings upgrades, we believe a proportion of it will ultimately be unsustainable as supply chains normalise. POT is currently trading at a one-year forward PE of ~45x, above its historical trading implied multiple (~40x) given the current prevailing 10-year bond rate of ~1.7%.&nbsp;With medium term container terminal capacity issues, log market volatility, rising&nbsp;capex&nbsp;and an elevated share price, we retain an UNDERPERFORM rating.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/226/791/original/image_89567896221630283477113.png?1630283477" class="editor-image img-responsive" data-smartkarma-image-id="226791"></figure>
<div>
<h3>What's changed?&nbsp;</h3>
</div>
<div id="m_6750246438609450617iwrmo3">
<ul>
<li><strong>Earnings</strong>:&nbsp;Modest upgrades to FY22E to reflect higher container storage charges&nbsp;</li>
<li><strong>Target price</strong>:&nbsp;Lifted by NZ$0.40 to NZ$6.40</li>
</ul>
</div>
<div>
<h3>Revenue and volume lift&nbsp;</h3>
</div>
<div id="m_6750246438609450617ip8mh">
<p>Stronger than anticipated revenue growth (+12% against the prior year) in the year reflected, (1) high margin container yard storage charges, and (2) the full consolidation of the Timaru Container Terminal from October 2020 following the buy-out of JV partner, Kotahi. Overall trade volumes grew +4%, despite a -4% decline in container volumes (a material decline in transhipments due to a Maersk service change benefitting Lyttelton) as log exports rebounded, Kiwifruit exports grew and coal imports were up strongly.&nbsp;</p>
</div>
<div>
<h3>Storage benefit from congestion</h3>
</div>
<div id="m_6750246438609450617izf8g">
<p>Global and local&nbsp;congestion, together with constrained container terminal and rail capacity&nbsp;has impacted POT. We estimate the average revenue generated per container has lifted +17% (ex-marine charges) during the year, reflecting the significant increase in storage charges particularly in 2H21. These additional charges have more than offset the costs of congestion relating to&nbsp;reduced container wharf productivity (i.e. higher unit costs for container movements).&nbsp;&nbsp;&nbsp;</p>
</div>
<div>
<h3>Capacity and expansion constraints&nbsp;</h3>
</div>
<div id="m_6750246438609450617ik47g">
<p>The southern wharf extension of Sulphur Point remains a medium term objective having been held up by red tape thus far. In the meantime, POT is capacity constrained and unable to take advantage of Ports of Auckland's problems. It appears to be accelerating the investment in its automation project (auto stacking cranes)&nbsp;which should eventually create more yard storage&nbsp;but inevitably comes with automation integration challenges. Consequently,&nbsp;capex&nbsp;is likely to increase over the next few years.&nbsp;</p>
</div>

Port of Tauranga FY21&nbsp;—&nbsp;Earnings in Storage&nbsp;

UNDERPERFORM
Port of&nbsp;Tauranga&nbsp;(POT) reported a strong FY21 result, ahead of expectations and management guidance, driven by a step-up in second half on-port container storage revenues. The port is navigating global and local congestion well and has more than offset operational challenges and a rising cost base with pricing moves, particularly for container storage. While the year ahead should benefit further from congestion related storage income, resulting in likely consensus earnings upgrades, we believe a proportion of it will ultimately be unsustainable as supply chains normalise. POT is currently trading at a one-year forward PE of ~45x, above its historical trading implied multiple (~40x) given the current prevailing 10-year bond rate of ~1.7%.&nbsp;With medium term container terminal capacity issues, log market volatility, rising&nbsp;capex&nbsp;and an elevated share price, we retain an UNDERPERFORM rating.


What's changed?&nbsp;



Earnings:&nbsp;Modest upgrades to FY22E to reflect higher container storage charges&nbsp;
Target price:&nbsp;Lifted by NZ$0.40 to NZ$6.40



Revenue and volume lift&nbsp;


Stronger than anticipated revenue growth (+12% against the prior year) in the year reflected, (1) high margin container yard storage charges, and (2) the full consolidation of the Timaru Container Terminal from October 2020 following the buy-out of JV partner, Kotahi. Overall trade volumes grew +4%, despite a -4% decline in container volumes (a material decline in transhipments due to a Maersk service change benefitting Lyttelton) as log exports rebounded, Kiwifruit exports grew and coal imports were up strongly.&nbsp;


Storage benefit from congestion


Global and local&nbsp;congestion, together with constrained container terminal and rail capacity&nbsp;has impacted POT. We estimate the average revenue generated per container has lifted +17% (ex-marine charges) during the year, reflecting the significant increase in storage charges particularly in 2H21. These additional charges have more than offset the costs of congestion relating to&nbsp;reduced container wharf productivity (i.e. higher unit costs for container movements).&nbsp;&nbsp;&nbsp;


Capacity and expansion constraints&nbsp;


The southern wharf extension of Sulphur Point remains a medium term objective having been held up by red tape thus far. In the meantime, POT is capacity constrained and unable to take advantage of Ports of Auckland's problems. It appears to be accelerating the investment in its automation project (auto stacking cranes)&nbsp;which should eventually create more yard storage&nbsp;but inevitably comes with automation integration challenges. Consequently,&nbsp;capex&nbsp;is likely to increase over the next few years.&nbsp;


Port of Tauranga: FY21 — Earnings in Storage