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Morningstar | Port of Tauranga’s Strong Volume Growth Translates to Only Modest Earnings Growth in 1H19

Wide-moat Port of Tauranga’s first-half fiscal 2019 NPAT rose 4% to NZD 49 million. Management expects full-year earnings to come in at the top of the previous guidance range of NZD 96 to 101 million, in line with our prior expectations. We make minor adjustments to our forecasts--revenue is tracking above prior expectations thanks to strong volume growth but so too are costs. Our bottom line fiscal 2019 earnings forecast is largely unchanged and we maintain our NZD 4.00 per share fair value estimate. At current prices, the stock is overvalued based on our discounted cashflow model. Other valuation metrics support this view, including a lofty P/E ratio of 35 times and a meagre dividend yield of 2.5% excluding special dividends. Forecast to be in the mid- to high-single digits for the medium term, earnings growth is not sufficient to justify these expensive metrics.

Total trade volumes were strong, up 9% to 13.6 million tonnes. The number of ships calling at port fell 5%, but this was more than offset by continued growth in the average size of ships as Port of Tauranga’s plans to become an international hub servicing larger ships comes to fruition. Management is investing to support ongoing growth. A ninth crane will be added in 2020, and preparations are underway to extend the container quay south by up to 50% in length by converting port-owned land. Existing wharf space is being reconfigured to further improve efficiency, and train frequency can be increased as required. The Port’s balance sheet remains in good shape--we forecast net debt/EBITDA of 2.5 times in fiscal 2019, which positions it well to debt-fund necessary capital expenditure without taking undue risk.

Exports were up 11% to 8.6 million tonnes in the first half, with logs, meat, kiwifruit and apples the highlights. Insatiable demand from China has pushed log prices to international records, boding well for ongoing strength in volumes. Over the longer term though, Chinese building construction is likely to slow. Imports increased at a solid rate of 6% to 5 million tonnes. Volumes of key imports of oil, fertilisers, chemicals and bulk liquids all fell marginally, but this was offset by sharp growth in salt and grain imports.

Reform of employment law is an ongoing risk to the Port’s efficiency and productivity. Other risks include the potential for an economic downturn and expansion of competing ports.