Forum Archive Index - February 2004

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Did anyone else notice the upbeat half year result posted by the 
Lyttelton Port Company?
Of course the media didn't report it like that.  They reported that a 
$11.6m projected annual profit, a flat result on last year, but 
nevertheless up 4% on the projected figure of $11.2m delivered at the 
AGM just four months ago.   The significance of this result?   It means 
that the dividend, considered by some to be under threat after the 
AGM,  is safe.

Based on a share price of $1.63, LPC gives a gross yield of just over 
10% (based on a 33% tax rate).    Remember that this projected profit 
increase has come *despite* the cost overruns on the coal loading 
project, the loss of the Fronterra business and the severe downturn in 
the log trade and a decrease in the total number of ship visits of 7%.

The coal facility would be now fully on the LPC books at $31m and 
capitalized over its twenty five year life, the extra depreciation is 
$31m/25=$1.24m per year.  Adding the extra long term interest to be 
paid on the invested capital (say at 7.5%) to this higher depreciation 
we can expect extra ongoing costs at LPC to be:

0.075($31m)+$1.24m= $3.57m per year.  

That equates to a reduction in underlying profits of 0.66x $3.57m= 
$2.35m, yet the projected profits for FY2004 have been revised up to 
$11.6m.

There are more dark depreciation clouds on the horizon.   The fuel 
wharf is in urgent need of replacement, and means another $15m to be 
found from borrowings.  That will result in extra costs of 

0.075($15m)+ ($15m/40)= $1.5m, 

which equates to a $1.0m hit on after tax profit from FY2005 onwards.   
Nevertheless the progress made in the last four months gives me 
every confidence that management will be able to rise to this 
challenge.  I will now be surprised if the dividend is cut in FY2005, 
whereas just a few months ago I had seen a dividend cut as inevitable.  

Am I going to make my fortune by buying LPC shares?    No.    But for 
the 'income investor', even taking into account likely rises in company 
borrowing costs,  that 10% gross yield has to be very attractive.  For a 
utility that  10% return is unbeatable.   And that is why I have been 
buying LPC again, today.

SNOOPY

discl: hold LPC


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on Pegasus Mail version 4.02
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Anticipate the anticipation!"




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