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>Transport&nbsp;Sector<br>Two Ports, Too Expensive</h2>
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<p>The two listed ports under our coverage, Port of Tauranga (POT) and Napier Port (NPH), provide investors with exposure to two very different infrastructure players, given the disparity in their respective return on capital profiles, and strategic and competitive positioning. Port of Tauranga (POT) is the standard-bearer for the industry. It defines itself as New Zealand's hub port. It generates an attractive return on capital, has delivered industry leading cargo growth over the longer term and has a history of rational capital allocation. Investors can afford to pay a premium for POT, yet despite its high quality attributes the current premium is elevated, in our opinion, particularly given the recent rise in bond rates. We retain an UNDERPERFORM rating on POT. In contrast, NPH has a very different profile. It trades at a significant discount to POT, justifiably so, given its lower return on capital, lower growth track record, and greater cargo concentration. In particular, ​NPH's reliance on pip-fruit and forestry exports leave it exposed to short term fluctuations in supply. The current labour shortages for seasonal workers may dampen near term earnings expectations. Moreover, over the medium term we anticipate its 6 Wharf investment will significantly dent NPH's return on capital. We downgrade our rating on NPH to UNDERPERFORM from NEUTRAL.</p>
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<h3>Near term port industry headwinds</h3>
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<p>Ports are long term infrastructure players that ordinarily shouldn't be overly impacted by short term 'noise'. However, this isn't always the case. Near term cargo and shipping service wins and losses tend to get priced into perpetuity. The current congestion issues in global shipping and at Ports of Auckland (POAL) have both positive and negative implications for POT and NPH. Congestion generally adds cost as berthing windows are missed, container yard inefficiencies arise, and crane productivity suffers. Moreover, equipment (empties) becomes scarce for exporters, which impacts port demand. POT is benefitting from POAL's woes but is short of capacity and not able to fully leverage the situation. Should POAL's problems be resolved POT would have some at-risk cargo.&nbsp;</p>
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<h3>Return on capital&nbsp;</h3>
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<p>POT generates around double the pre-tax return on capital employed (ROCE) of NPH. This reflects its scale, operating efficiencies and strict&nbsp;capex&nbsp;discipline.&nbsp;NPH's&nbsp;ROCE is currently in excess of its WACC, but is in decline due to the significant increase in capital allocated to its 6 Wharf investment. Further&nbsp;afield&nbsp;the wider New&nbsp;Zealand&nbsp;port industry has historically been synonymous with sub-optimal capital allocation, particularly among container ports that contest container trade with other ports. This has led to depressed sub-WACC returns across a number of ports&nbsp;that all have container operations. More rational, industry-wide, decision making in future may assist both POT and NPH in their quest for improved profitability and higher returns.&nbsp;</p>
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<h3>Downgrade NPH to UNDERPERFORM</h3>
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<p>We downgrade Napier Port (NPH) to UNDERPERFORM from NEUTRAL to reflect (1) near term trading headwinds given pip-fruit harvest constraints as a result of labour shortages, (2) shipping industry congestion that is impacting the availability of empty containers, (3) the deteriorating returns outlook as a result of the 6 Wharf investment, and (4) the recent rise in bond yields, which has had little impact on port share prices to-date.&nbsp; NPH is due to release its 1H21 results on 25 May 2021.&nbsp;</p>
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<div><strong>Andy Bowley</strong></div>
<div><a href="mailto:andy.bowley@forsythbarr.co.nz" target="_blank" rel="noopener">andy.bowley@forsythbarr.co.nz</a></div>
<div>+64 4 495 8246</div>
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<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
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Transport&nbsp;Sector Two Ports, Too Expensive


The two listed ports under our coverage, Port of Tauranga (POT) and Napier Port (NPH), provide investors with exposure to two very different infrastructure players, given the disparity in their respective return on capital profiles, and strategic and competitive positioning. Port of Tauranga (POT) is the standard-bearer for the industry. It defines itself as New Zealand's hub port. It generates an attractive return on capital, has delivered industry leading cargo growth over the longer term and has a history of rational capital allocation. Investors can afford to pay a premium for POT, yet despite its high quality attributes the current premium is elevated, in our opinion, particularly given the recent rise in bond rates. We retain an UNDERPERFORM rating on POT. In contrast, NPH has a very different profile. It trades at a significant discount to POT, justifiably so, given its lower return on capital, lower growth track record, and greater cargo concentration. In particular, ​NPH's reliance on pip-fruit and forestry exports leave it exposed to short term fluctuations in supply. The current labour shortages for seasonal workers may dampen near term earnings expectations. Moreover, over the medium term we anticipate its 6 Wharf investment will significantly dent NPH's return on capital. We downgrade our rating on NPH to UNDERPERFORM from NEUTRAL.


Near term port industry headwinds


Ports are long term infrastructure players that ordinarily shouldn't be overly impacted by short term 'noise'. However, this isn't always the case. Near term cargo and shipping service wins and losses tend to get priced into perpetuity. The current congestion issues in global shipping and at Ports of Auckland (POAL) have both positive and negative implications for POT and NPH. Congestion generally adds cost as berthing windows are missed, container yard inefficiencies arise, and crane productivity suffers. Moreover, equipment (empties) becomes scarce for exporters, which impacts port demand. POT is benefitting from POAL's woes but is short of capacity and not able to fully leverage the situation. Should POAL's problems be resolved POT would have some at-risk cargo.&nbsp;


Return on capital&nbsp;


POT generates around double the pre-tax return on capital employed (ROCE) of NPH. This reflects its scale, operating efficiencies and strict&nbsp;capex&nbsp;discipline.&nbsp;NPH's&nbsp;ROCE is currently in excess of its WACC, but is in decline due to the significant increase in capital allocated to its 6 Wharf investment. Further&nbsp;afield&nbsp;the wider New&nbsp;Zealand&nbsp;port industry has historically been synonymous with sub-optimal capital allocation, particularly among container ports that contest container trade with other ports. This has led to depressed sub-WACC returns across a number of ports&nbsp;that all have container operations. More rational, industry-wide, decision making in future may assist both POT and NPH in their quest for improved profitability and higher returns.&nbsp;


Downgrade NPH to UNDERPERFORM


We downgrade Napier Port (NPH) to UNDERPERFORM from NEUTRAL to reflect (1) near term trading headwinds given pip-fruit harvest constraints as a result of labour shortages, (2) shipping industry congestion that is impacting the availability of empty containers, (3) the deteriorating returns outlook as a result of the 6 Wharf investment, and (4) the recent rise in bond yields, which has had little impact on port share prices to-date.&nbsp; NPH is due to release its 1H21 results on 25 May 2021.&nbsp;



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





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Transport Sector: Two Ports, Too Expensive