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Special Report: Ports of Call

By Phil Boeyen, ShareChat Business News Editor

Friday 6th April 2001

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The Ports Capital Index, a measurement of the country's listed ports, is at its highest level for more than three and a half years.

But that doesn't mean all port companies are doing well, partly because the index includes Auckland International Airport which makes money from a number of sources, not just imports and exports.

One of the biggest challenges facing the listed seaports is essentially the same as for any business, which is to keep the customers happy.

That means looking after shipping lines and helping them to be as profitable as they can be, which is where 'hubbing' comes in.

Hubbing simply refers to the fact that shipping companies would prefer to use only one port as their main destination for both dropping off and picking up loads.

Ports of Auckland says its vision is to be the largest and most efficient container hub in New Zealand.

POA is already the country's leading import destination, but not content with waiting for the exports to come to them, the company last month announced it was spending $5 million to get into the rail freight business.

Under an agreement with Tranz Rail the port company is planning to have at least one dedicated return rail service a day for refrigerated and general container freight between Palmerston North and Auckland.

POA's container-handling division, Axis Intermodal, will own the rolling stock and the company has contracted out the rail service to Tranz Rail for 15 years.

What the port company has done, in effect, is strengthen its lines of supply.

In the port's half-year result, chairman Neville Darrow says the company is committed to removing impediments that have slowed the move to hubbing in New Zealand, such as high domestic freight rates.

"There is a determination to play a significant role in improving efficiencies in freight logistics for shipping lines and for exporters and importers, and good progress is being made on several specific initiatives."

POA says its core strategy is based on the global growth trends in containers, bigger vessels, and the need for facilities to accommodate bigger container exchanges.

Already the port is making plans to dredge shipping lanes in Auckland to make way for container ships that are a third or more larger than those which currently stop off.

The company's largest shipping line customer, P&O Nedlloyd, has announced it will deploy bigger ships on the route linking Europe, North America, Australia and New Zealand from next year.

The concept behind Ports of Auckland's push into the lower North Island for business is not unique however.

Port of Tauranga (NZSE: POT) increased the pressure on its northern competitor when it opened its Metroport in South Auckland in 1999.

Metroport is the country's first inland dry port and, as with POA's Palmerston North venture, adds an extra dimension to the service.

Any container imports into Tauranga are delivered directly by rail to New Zealand's biggest city while exports from Auckland head in the other direction using the rail link

Just last month the port said it had won further business from its Auckland rival, with shipping line Fesco choosing to make Tauranga its only North Island port of call for its fixed day weekly service to the Far East.

Winning Fesco's business is expected to increase container volumes through Tauranga by at least 8% over current volumes, and CEO Jon Mayson says the move has reinforced the port's decision to invest in the further development of Metroport.

POT also has other irons in the fire with the development of a new deepwater port at Marsden Point in Northland, which it will own jointly with Northland Port Corporation (NZSE: NTH).

The joint venture company, called Northport, is purchasing assets from NTH at valuation for the project and will also take over the port operations at the Port of Whangarei.

NTH says it decided to partner with POT rather than develop the new deep water port on its own because studies showed that a joint venture offered such advantages as reduced financial risks and the best long-term return for shareholders.

It also offered exposure to the Port of Tauranga's experience in handling major forest products cargoes and its links with major shipping lines.

Initial capital for the JV will be $30 million.

This week NTH announced a special dividend of 15 cents per share as it sought to return some of its spare cash to shareholders.

The company last year finished what it called a "tidy up" of its assets, after selling off Marine Steel, Central Cranes, Northport Engineering and 50% of tug and barge subsidiary, Sea-Tow.

Following the Sea-Tow divestment the port's main non-cash assets are its Northport interest, 50% of Sea-Tow, and land at Port Whangarei and Marsden Point.

A new Carter Holt plant at Marsden Point producing laminated veneer lumber is set to play a large part in the future of Northport, with the forest products company looking to export around $70 million of the product a year.

Despite the expansion in Northland, Forsyth Barr analyst Ian Graham says out of all the port companies Ports of Auckland is recommended from a valuation point of view.

He says POA has a current EV (Enterprise Value) of around 10 times earnings compared with Port of Tauranga at 14.5 times earnings.

"Ports of Auckland is clearly the cheapest port but we want to see that they can provide the services that will allow shipping lines to contest export volumes."

Mr Graham says although the majority of imports come into Auckland, shipping lines want to be able to load up with exports from there as well.

"The establishment of their Palmerston North operation means they are providing a service for their customers to contest the export volumes.

"Even if POA only made, say, a 10% margin on getting the exports to the shipping customers it still grows the business overall and adds an extra dimension to the port's business."

Mr Graham believes POT has a premium built into the price from strong growth in the late 90s, and says there is also a premium for the company's solid management.

However he is picking the company will disappoint with earnings in the second half of the year.

"Earnings were flat in the first half and although there is plenty of talk about containerisation, POT still earns about 50% of its revenue from log exports.

"With Carter Holt's log volumes down about 20%, that means there will be a flow on effect for POT."

In the South Island, coal volumes for the six months ended December rose 25% at Lyttelton Port Company (NZSE: LPC) compared with last year while container volumes only rose 3%.

The company has noted that trading is tight, in part due to an increase in fuel costs. Profit at the half-year was down to $6.6 million compared with $7.1 million previously.

MD, David Viles, says the performance highlights that the company is in an extremely competitive market.

"This is evidenced by shipping lines working closer together with further rationalisation occurring in the international lines both in terms of port calls and aggregation of services."

"Our response to the competition we face, demands increased efficiency and productivity at the port. Significant parts of our business, particularly the container terminal, remain under pricing pressure from our customers and we must continue to find ways to be more competitive."

The operator of the Port at Bluff, South Port (NZSE: SPN), is picking a slightly reduced full year profit after a decline in operating earnings for the first half of the year.

Although cargo volume was up for the interim period, tax paid earnings fell from $945,000 to $910,000.

South Port's share price of around $1.20 is at its highest for more than three years, no doubt buoyed by a higher interim dividend and last year's share buyback of more than 6 million of the company's shares.

Following the buyback the total number of shares on issue stands at around 26 million, which has helped to improve the company's earnings per share figure.

Ian Graham says in terms of growth prospects and liquidity the South Island ports simply don't offer a lot of scope.

"The catalysts for growth just aren't there," he says.

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