Originally Posted by
Ricky-bobby
Something I got from shareclarity this morning: Considering the
Napier Port IPO?
Napier Port is planning to list on the New Zealand Stock Exchange next month. We have reviewed its product disclosure statement and compared it to the other ports and infrastructure companies we cover. In brief:
We did not see anything too disconcerting in the product disclosure statement or with its proposed price;
Napier Port should fair better than other ports with the recent drop in log prices; but
We see next year's international shipping regulations as a material risk that could call into question the planned expansion of its container wharf. These regulations have had little coverage despite their potential impact on many other companies.
1. Napier Port looks fairly priced
We reviewed the Napier Port product disclosure statement and did not see anything unexpected or too disconcerting with its operations, financials, stated risks or proposed share price. Napier Port is being priced at NZD2.27-2.60 a share, which is similar to our valuation of NZD2.25 and equates to a 24.5x P/E ratio* and 2.9% dividend yield**. This is in line with South Port, Northport and even Port of Tauranga on some metrics.
Please visit Shareclarity for more information and perspectives on each of these companies.
2. Napier Port should maintain its log volumes, at least in the short term
Napier Port is susceptible to changes in global log prices, but the recent drop may not impact its near-term earnings if it can win volume from Wairoa and the 'Bermuda Triangle'.
Pine trees in the Central North Island are usually felled at 24-28 years of age. Younger trees have too many knots and older trees are too big to fit most sawmill headends. Fortuitously, there are several thousand hectares of forest near Wairoa that were planted in 1991 and will soon need to be felled, irrespective of price. These logs could go to one of three ports:
Eastland Port is the closest port, but it is facing maintenance issues that may prevent it from handling large volumes;
Port of Tauranga is connected via State Highway 2 and has the lowest log handling fees, but it also has the longest lead times and will incur extra road transportation costs over the Urewera Ranges***; or
Napier Port is also connected by via State Highway 2 and has the shortest turnaround times, but high log handling fees.
Napier Port is well-positioned to win most of the Wairoa volume and if not, it could compete more aggressively with Port Taranaki and Centreport for logs in the ‘Bermuda Triangle’ between Palmerston North, Whanganui and Taumarunui.
3. Napier Port may want to reconsider the planned expansion of its container wharf
Almost every shipping nation, including China, has ratified Marpol Annex VI, an agreement to limit ship sulphur emissions from 1 January 2020. What's important is that ships are being modified to use more expensive fuel-types that are not readily available in New Zealand. Ships travelling to New Zealand may, therefore, need to increase their shipping fees and reduce the number of ports they visit. This could:
Lower international cargo volumes (unfavourable). New Zealand is geographically far from most of its trading partners, so transportation accounts for a large part of the overall cost of imported and exported goods. Higher shipping fees could mean New Zealand consumers purchase more goods that are produced domestically rather than importing them. It could also mean New Zealand exporters start to produce a higher number of value-added products on which they can recoup the higher shipping fees rather than exporting lower-value commodities that compete with other global producers with shorter distances to markets; and
Consolidate cargo at fewer ports (favourable). Napier Port is located between three smaller ports - Port Taranaki to the West, Eastland Port to the East and Centreport to the South - whose cargo could instead be transported to Napier by road or rail; and
Lead to port specialisation (unfavourable). Napier Port is unlikely to win higher-value container volume over Port of Tauranga because it is closer to Auckland, has larger container infrastructure and lower cargo handling fees. Napier Port may, therefore, be limited or better suited as a specialist forestry and breakbulk terminal.
We have laboured this point because the impacts of these new shipping regulations will be seen early next year and they have the potential to affect many companies particularly ports, agriculture, logistics, retailers and manufacturers. More specifically, it could call into question the planned expansion and expected return on Napier Port's container wharf.
* P/E or price to earnings ratio is a company’s share price divided by its forecast earnings per share. Investors generally look for companies with lower P/E ratios and higher earnings growth than their peers as it suggests they may be undervalued by the market.
** Dividend yield is a company’s post-tax dividends per share divided by its share price. Investors generally look for companies with higher dividend yields than their peers, provided they also have dividend coverage ratios above 1.0x, as it suggests they can keep paying dividends without increasing debt and they may be undervalued by the market.
*** Napier Port is favourably located on the Southern side of the Urewera Ranges, which creates a natural commercial barrier between it and Port of Tauranga. Southern forest management companies generally favour Napier Port over Port of Tauranga even though its average handling fees are higher. This is because it often has shorter lead times and there are likely to be extra transportation costs to move logs over the ranges to Tauranga.
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