Timaru's container renaissance hits Lyttelton Port's business

By Peter V O'Brien

Friday 12th October 2001

The sound performance of defensive stocks relative to the rest of the sharemarket since the terrorist attacks on the US continued over the past week,

This matter was discussed in the O'Brien column (NBR, Oct 5) in the context of the two listed brewers.

Defensive stocks were said to include utilities, basic foods, confectionery and soft drinks and others whose products and profits weathered recessions in good shape.

The term "utilities" covers several industries, such as electricity, gas, water and telecommunications. It can be extended to port companies, because those businesses have most of the operational and financial features common to all utilities.

Utilities have high proprietorship ratios, low debt, significant cashflows and large dividend payouts relative to earnings.

They also have substantial investments in existing infrastructure and consequently relatively low requirements for replacement.

Expansion programmes may call for new investment, as in the Port of Tauranga and Northland Port Corporation joint venture to develop a new deep-water port at Marsden Point.

A week on the sharemarket is hardly a guide to the trend but share price movements last week continued what happened since the events of September 11 (US time).

The NZSE40 capital index improved 1.9% in the week ended October 5 but most electricity and port companies did better in percentage terms.

Lyttelton Port Company's share price increased 6.1%, Natural Gas Corp 7.8%, Ports of Auckland 3.6%, Powerco 8%, South Port 16.2%, Trustpower 3.3%, UnitedNetworks 2.9% and Northland Port Corporation 5%.

Horizon Energy and Port of Tauranga were below the movement in the NZSE40 capital index with gains of 1.5% and 1.4%, respectively.

Contact Energy declined slightly but a fall of 2c on a base price of $3.40 was insignificant.

Reasons other than a move to defensive stocks applied to some price changes but the overall movements were indicative of what happens in uncertain times.

The jump in South Port's share price last week was partly attributable to the announcement of an 11.5c-a-share special dividend payable on shares registered at October 19.

South Port received an early repayment of $3.4 million owed under the sale of rural assets, reducing debt to a level that was commercially inappropriate. The special dividend would realign the mix of debt and equity.

Defensive stocks might be appropriate investments in times of uncertainty and possible recession but they are not immune from the general pressures applicable to all companies, including competition.

Lyttelton Port Company's annual meeting heard an example of competitive pressure which could be extended to the operations of other port and electricity groups.

It is easy to view such companies as regional operators, often with an effective monopoly. Lyttelton Port provided a case history that was relevant to other utilities.

Chairman Brent Layton discussed the issue of competition for business from other ports, specifically Timaru.

Dr Layton said volumes through Lyttelton's container terminal last year fell 1% and unit revenues fell 4%.

"Our nearest competitor, Timaru, has taken our container trade growth from us," he said.

That might sound like Goliath complaining about nasty David slinging stones but the competition was real.

Dr Layton said Timaru was a significant port relative to Lyttelton before port corporatisation in 1988 but declined after the changes.

"Labour relations stabilised and productivity improved dramatically at your port [Lyttelton], and economic factors, rather than political lobbying power, dictated where investments went."

Dr Layton explained that a change to the way the dairy industry contracted for shipping improved the relative attractiveness of Timaru to shipping lines.

There were also changes to shipping companies' strategies, resulting in MaerskSealand (described as the world's largest container line) including Timaru as one of its regular ports of call, whereas previously Lyttelton was its only South Island call.

Dr Layton said his company estimated Timaru's "renaissance" cost Lyttelton 6000-8000 TEUs (20-ft equivalents) of containers of lost growth on an annual basis.

The "obvious economic response" would be for Lyttelton and Timaru to merge and rationalise container and other port services in Canterbury but the company had to overcome three hurdles:

Timaru's dominant shareholder was the local council, which, it was suggested, had strategic motives for holding the shares, ensuring the port operated for the local economy's "benefit;"
The right price had to be negotiated but Timaru's dominant shareholder might not sell at a value based on the true economic returns able to be earned from the port without rationalisation;

The Commerce Act was a potential regulatory hurdle.

Dr Layton's general discussion and particular points were specific to Lyttelton Port but the general issues were applicable to there port groups and to electricity companies, some of which have already tackled them.

Local authorities shareholdings in such companies have potential for conflicts of interest.

Investors should be cautious about labelling stocks as defensive, without distinguishing between them and assessing their particular circumstances.

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