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S&P raises Port of Tauranga's credit rating to 'A-'

Wednesday 28th August 2019

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Port of Tauranga’s credit rating upgrade is “fantastic news” and makes it one of the few ports around the world with such a high credit rating, says chief executive Mark Cairns.

That’s despite the port putting “a bit of pressure” on its balance sheet by continuing to pay special dividends.

“That has quite an impact on our debt financing costs,” Cairns says.

International ratings agency Standard & Poor’s raised the Tauranga port’s rating to 'A-' from 'BBB+' with a stable outlook because it “has consolidated its competitive position within New Zealand on the back of strategic investments and constrained competitors.”

Auckland Council and the government have been investigating ways to ease constraints at Ports of Auckland, including diverting cargoes to Northport at Marsden Point south of Whangarei. Earlier this month, Mayor Phil Goff asked Ports of Auckland to accelerate investigations into better ways of clearing imported cars off the city's wharves.

Port of Tauranga, which is 54 percent owned by the investment arm of the Bay of Plenty Regional Council, is New Zealand’s largest. It took over from Ports of Auckland as the largest container port in 2015 with the gap widening considerably since then.

Council-owned Ports of Auckland doesn’t have a credit rating.

Management is maintaining headroom “against our threshold of a ratio of funds from operations to debt of 23 percent,” the ratings agency says.

It expects the port to maintain that ratio or better “even if operating conditions become unexpectedly adverse.”

S&P expects the Auckland port’s constraints will continue, allowing the Tauranga port to “consolidate its strategic position and competitiveness” relative to Auckland and any threat to its position from Auckland “is weak” for at least the next two or three years. 

The Tauranga port had gearing of 27.5 percent at June 30, up slightly from 26.2 percent a year earlier, while cash flow in the latest year rose to $112.2 million from $99.4 million the previous year.

It is paying the final of four 5 cents per share special dividends for the year just gone and the board is planning to continue paying 2.5 cents special dividends for the next four years, subject to earnings performance.

That’s on top of the ordinary final dividend of 7.3 cents per share, which brought the annual ordinary payout to 13.3 cents, up 4.7 percent from the previous year.

The port lifted net profit 6.7 percent to $100.6 million for the year ended June.

Cairns says the port does have some ongoing investment planned, including planning a fourth container berth and will be putting out a tender for automated stacking cranes.

However, the major $350 million investment in dredging the harbour to allow entry to much bigger ships and building the infrastructure to handle them was completed in 2016.

In the year ended June, the port’s cash spending on investment activities was $31.5 million while depreciation totalled $27.6 million.

“With our reliability of earnings and the state of our balance sheet, we can continue special dividends,” Cairns says.

He says the 11.2 percent increase in transhipments – containers delivered on large ships to Tauranga and then ferried around the country to other ports – in the year just gone “shows that the big ships strategy is working.” Transhipments now account for 32 percent of all container traffic at the port.

Port of Tauranga won’t be providing guidance for the current year until its annual meeting on Oct. 25, although it has warned that log exports, which rose 12.5 percent to 7.1 million tonnes in the year just gone, won’t continue rising at such a pace in the short term because of a drop in prices and demand from China, New Zealand’s largest log export market.

Cairns says by then, the port will have first-quarter results but he isn’t expecting a huge fall-off in log exports.

Most of the logs through Port of Tauranga come from forests owned by pension funds which tend to maintain reasonably steady volumes. As well, the price of A-grade logs had fallen as low as US$104 a tonne but has since recovered to US$115.

Cairns says it’s hard to say how much the trade war between the US and China will affect the port and New Zealand trade generally.

“We’re not seeing it at the moment” and any impact Tauranga might feel is being offset by its hub strategy because cargo that would have previously gone straight to smaller ports is now going through Tauranga.

Cairns says the big disappointment of the past year was the poor result from Coda, the joint venture with Fonterra’s Kotahi, which reported a $2.4 million net loss compared with a $2.8 million profit the previous year.

“The business wasn’t well run for two years,” but management has changed, including the appointment of chief executive Gerard Morrison, who previously worked for Maersk, from April and Coda should return to profitability this year.

Morrison has "done a bit of a Ross Taylor" in cleaning out the Coda business, he says. Taylor is Fletcher Building's chief executive who announced huge write-offs of Fletcher's high-rise construction projects within months of taking the helm.


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