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>Port of Tauranga<br>Logs: Historic Tailwind to Future Headwind</h2>
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<p><strong>UNDERPERFORM</strong></p>
<p>Port of Tauranga (POT) is a premium infrastructure stock given its consistent earnings and favourable long term growth profile, yet remains expensive in both absolute and relative terms, in our opinion. Moreover, with medium term container terminal capacity issues, rising capex and bond rates increasing, we retain an UNDERPERFORM rating. This report is published in tandem with our report NZ Ports — Log Exports: Timber! Forestry represents a key trade cargo for POT, yet its overall exposure is well balanced versus other bulk commodities and containers. While forestry has historically been a key growth engine for the port we expect it to be a headwind over the longer term, helping to slow average trade volume below its long term historic average of ~+5% pa.&nbsp;</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;Forecasts in FY23&nbsp;and FY24&nbsp;lifted to reflect higher than previously anticipated log export volumes. We now assume a peak in volumes of 6.7mT per over the medium term.</li>
<li><strong>Target price</strong>:&nbsp;Lifted 5c to NZ$6.45&nbsp;given near term earnings changes partly mitigated by lower long term log export assumptions.</li>
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<h3>Forestry will be drag on future trade volume growth&nbsp;</h3>
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<p>We estimate forestry contributes ~12% of&nbsp;POT's&nbsp;revenue in FY22. It is far less exposed to forestry than Napier Port (NPH) and has a less volatile longer term volume outlook given greater exposure to larger forestry players and a more favourable planting profile. While export log volumes have grown substantially over the past decade, much of this was pre-2015 given early harvesting activity. Growth is limited from current levels and therefore, notwithstanding mini cycles driven by export price volatility, we expect forestry to act as a drag on overall&nbsp;cargo growth in future.&nbsp;</p>
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<h3>Domestic processing represents key competition for Central North Island logs</h3>
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<p>A normal Central North Island harvest year will yield ~13m cubic metres (broadly&nbsp;~13mT) of logs, of which more than 6mT are processed&nbsp;locally. The remainder is exported, almost exclusively by POT, in raw log form on charter vessels. While domestic processed timber may also be exported&nbsp;POT's&nbsp;volume in recent years has marginally declined and shown little volatility over the longer term.&nbsp;</p>
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<h3>Relatively&nbsp;stable export log profile&nbsp;</h3>
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<p>Management expects&nbsp;export log volumes over the medium term to range 6–7mT pa based on its customer harvesting intentions. Our revised assumptions are levied in the top half of this range through to FY25. After which our volume assumptions decline to ~5.2mT pa by FY30. We accept that short term log export price volatility will create, at times, material&nbsp;deviation from our base case forecasts. &nbsp;</p>
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Port of Tauranga Logs: Historic Tailwind to Future Headwind

UNDERPERFORM
Port of Tauranga (POT) is a premium infrastructure stock given its consistent earnings and favourable long term growth profile, yet remains expensive in both absolute and relative terms, in our opinion. Moreover, with medium term container terminal capacity issues, rising capex and bond rates increasing, we retain an UNDERPERFORM rating. This report is published in tandem with our report NZ Ports — Log Exports: Timber! Forestry represents a key trade cargo for POT, yet its overall exposure is well balanced versus other bulk commodities and containers. While forestry has historically been a key growth engine for the port we expect it to be a headwind over the longer term, helping to slow average trade volume below its long term historic average of ~+5% pa.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;Forecasts in FY23&nbsp;and FY24&nbsp;lifted to reflect higher than previously anticipated log export volumes. We now assume a peak in volumes of 6.7mT per over the medium term.
Target price:&nbsp;Lifted 5c to NZ$6.45&nbsp;given near term earnings changes partly mitigated by lower long term log export assumptions.



Forestry will be drag on future trade volume growth&nbsp;


We estimate forestry contributes ~12% of&nbsp;POT's&nbsp;revenue in FY22. It is far less exposed to forestry than Napier Port (NPH) and has a less volatile longer term volume outlook given greater exposure to larger forestry players and a more favourable planting profile. While export log volumes have grown substantially over the past decade, much of this was pre-2015 given early harvesting activity. Growth is limited from current levels and therefore, notwithstanding mini cycles driven by export price volatility, we expect forestry to act as a drag on overall&nbsp;cargo growth in future.&nbsp;


Domestic processing represents key competition for Central North Island logs


A normal Central North Island harvest year will yield ~13m cubic metres (broadly&nbsp;~13mT) of logs, of which more than 6mT are processed&nbsp;locally. The remainder is exported, almost exclusively by POT, in raw log form on charter vessels. While domestic processed timber may also be exported&nbsp;POT's&nbsp;volume in recent years has marginally declined and shown little volatility over the longer term.&nbsp;


Relatively&nbsp;stable export log profile&nbsp;


Management expects&nbsp;export log volumes over the medium term to range 6–7mT pa based on its customer harvesting intentions. Our revised assumptions are levied in the top half of this range through to FY25. After which our volume assumptions decline to ~5.2mT pa by FY30. We accept that short term log export price volatility will create, at times, material&nbsp;deviation from our base case forecasts. &nbsp;


Port of Tauranga: Logs Historic Tailwind to Future Headwind