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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Port of Tauranga</h2>
Tide Change in Growth
Port of Tauranga’s (POT) first time FY20 earnings guidance provided at its Annual Shareholder Meeting (ASM) suggests a more subdued year ahead following three years of strong growth. Group NPAT fell -6% against the prior year in first quarter trading, with trade tonnage down -1%. Softer volumes are being driven by weaker log exports, only partially offset by robust container growth. POT continues to trade at an elevated ~27x one year forward EV/EBITDA, reflecting above trend recent growth and low bond rates. In light of a more pedestrian growth outlook we retain an UNDERPERFORM rating.
What’s changed?
<ul>
<li>Earnings: FY20E NPAT cut by -6% to NZ$101m at the top end of the new guidance range of NZ$96m–NZ$101m; FY21E by -5%</li>
<li>Target Price: Lowered to NZ$5.15 from NZ$5.25</li>
</ul>
Softer growth outlook
POT’s ASM commentary refers to a “softening of growth in some cargo categories in the coming year”. In particular it references weaker log exports, and expects volumes to be consistent with FY18 levels, implying an -11% drop year on year. POT has provided first time FY20 NPAT guidance of NZ$96m–NZ$101m, which will mean a -4% to -9% cut to consensus estimates. The company typically doesn’t apply a conservative discount to its earnings guidance.&nbsp;
Slower first quarter
First quarter trade volumes were down -1% year on year, despite a +6% lift in container volumes. Log exports are now in decline in light of the recent material drop in pricing. Moreover, we suspect the trade in other bulk products has also weakened. Lower cargo volumes have contributed to a -6% decline in 1Q20 Group NPAT. However, given the magnitude of the decline we expect cost and/or associate/JV income have also featured.
Valuation less supported by growth
There remains a wide gap between our valuation/target price and the current share price. In a slowing growth environment we expect this to at least partially close. Like other infrastructure assets, POT’s two key value drivers are (1) bond rates, and (2) volume growth. Volume growth in recent years has been elevated given synchronisation of container and log export growth. However, the former has reverted to trend type levels, and the latter is now being impacted by lower log prices. Consequently, the growth backdrop is now less supportive to valuation.
<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>
<a target="_blank">Andy Bowley</a>
<a target="_blank">andy.bowley@forsythbarr.co.nz</a>
<a target="_blank">+64 4 495 8246</a>

Port of Tauranga
Tide Change in Growth
Port of Tauranga’s (POT) first time FY20 earnings guidance provided at its Annual Shareholder Meeting (ASM) suggests a more subdued year ahead following three years of strong growth. Group NPAT fell -6% against the prior year in first quarter trading, with trade tonnage down -1%. Softer volumes are being driven by weaker log exports, only partially offset by robust container growth. POT continues to trade at an elevated ~27x one year forward EV/EBITDA, reflecting above trend recent growth and low bond rates. In light of a more pedestrian growth outlook we retain an UNDERPERFORM rating.
What’s changed?

Earnings: FY20E NPAT cut by -6% to NZ$101m at the top end of the new guidance range of NZ$96m–NZ$101m; FY21E by -5%
Target Price: Lowered to NZ$5.15 from NZ$5.25

Softer growth outlook
POT’s ASM commentary refers to a “softening of growth in some cargo categories in the coming year”. In particular it references weaker log exports, and expects volumes to be consistent with FY18 levels, implying an -11% drop year on year. POT has provided first time FY20 NPAT guidance of NZ$96m–NZ$101m, which will mean a -4% to -9% cut to consensus estimates. The company typically doesn’t apply a conservative discount to its earnings guidance.&nbsp;
Slower first quarter
First quarter trade volumes were down -1% year on year, despite a +6% lift in container volumes. Log exports are now in decline in light of the recent material drop in pricing. Moreover, we suspect the trade in other bulk products has also weakened. Lower cargo volumes have contributed to a -6% decline in 1Q20 Group NPAT. However, given the magnitude of the decline we expect cost and/or associate/JV income have also featured.
Valuation less supported by growth
There remains a wide gap between our valuation/target price and the current share price. In a slowing growth environment we expect this to at least partially close. Like other infrastructure assets, POT’s two key value drivers are (1) bond rates, and (2) volume growth. Volume growth in recent years has been elevated given synchronisation of container and log export growth. However, the former has reverted to trend type levels, and the latter is now being impacted by lower log prices. Consequently, the growth backdrop is now less supportive to valuation.

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

Port of Tauranga: Tide Change in Growth