Container clash batters Auckland port

By Shoeshine

Friday 20th August 2004

Clad as it was in the raiment of boring respectability Ports of Auckland's annual result this week didn't draw a lot of media attention.

Reporters and analysts were briefed separately so it wasn't surprising two rather different pictures emerged.

The analysts, for instance, reported to their clients that the port's unions had issued strike notices a matter of some economic significance when it concerns the country's biggest export hub.

Chief executive Geoff Vazey doesn't appear to have mentioned this to the media, but maybe he wasn't asked.

Vazey put a positive spin on things generally, as the port has been wont to do in recent times.

The market, the drooping share price shows clearly, isn't convinced.

And the latest result has been no different.

The bottom line was a profit of $57.2 million but this was boosted by a net gain from one-offs, notably the sales of the Westhaven and Hobson West marinas, of $12.9 million.

Taking that out the profit was $44.3 million, up 7% on a year ago.

Those numbers looked solid enough. Seen through the analysts' focus, however, the situation is a bit more worrying.

Operating earnings before interest and tax, for instance, fell by 1.5% to $75.1 million.

That doesn't sound like much, but for a port company's operating earnings to fall when the economy has been running in fifth gear is distinctly suspicious.

The result, ABN Amro noted, was loaded with abnormals that tended to cloud the true picture.

While volumes rose the number of TEUs (containers) rose by 1.9% while break bulk volumes were flat revenue per container and per tonne fell, by 1% and 0.5% respectively.

By contrast, ABN noted, costs measured by the same metrics rose by 0.4% and by 0.9%.

In short, the port's margins are shrinking.

One problem, as the whole world knows, is that Auckland has been losing market share hand over fist for years to Port of Tauranga.

The key question, according to First New Zealand Capital, is whether Port of Tauranga's Metro Port expansion will continue eroding the Auckland port's market share.

"On this issue the jury is probably still out given that the loss of the NZAX (shipping line) contract is still fresh in the memory," the broker said.

Competition and cost worries aside, the port also has a problem persuading investors its capital management strategy is sound.

The company is undeniably overcapitalised. Interest-bearing debt of $103 million is only 20% of the $518 million total funds employed.

So there were high expectations the company would pay out a special dividend, at least distributing the one-off gains from the marina sale.

The decision not to do so raised eyebrows on two fronts.

Firstly, the port stuck with its dividend policy of paying out 75% of earnings but the 40.5c final payment included the abnormal gains.

This, ABN argued, goes against finance theory which says you shouldn't signal to the market a level of payout you won't be able to maintain.

In the absence of any further one-off gains from property sales, the broker forecasts the payment will have to fall to 32c this year.

Part of the board's rationale for holding off a special payment was that it was waiting for its new 80% owner, Auckland Regional Holdings (ARH), to communicate what it thought the company's strategic direction should be.

But the port company's directors shouldn't be making (or not making) decisions based on the interests or perceived interests of one shareholder alone, however big.

In a press release last week ARH itself acknowledged this, pointing out its two board appointees "are required to act in the best interests of the company and all its shareholders."

In any case the change in ownership is significant because ARH, as a vehicle of the Auckland Regional Council, has access to funding other than the port company's dividends, and so has a far wider range of strategic options for its stake than did the previous owner, Infrastructure Auckland.

ABN thinks joint ventures with other transport logistics companies, or some sort of merger with Northland Port Corporation, could be on the cards.

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