LPC

[Snoopy]

Extract from a newsletter I subscribe to.


What total nonsense! It is insulting that these people think shareholders are so stupid! In what School of Economics
does one invest $500 million in cash to “support” a business with a net present value of only $343-373 million? This is “best
industry practice”? Where? In North Korea? Venezuela? Somalia?

Clearly either
(1) the valuation of the port exceeds $500 million (and, as investors, we would estimate a fair valuation around $650-680 million or 635-665 cents per share) or
(2) the boards of LPC and CCHL are mis-allocating capital, investing $500 million of cash to build a business worth only $343-373 million.

Agree Blackcap. As I said in an earlier posting, with $500m and ending up with a business worth only $343-373 million, means that the Port's future investment plans are earning less than the cost of capital, thus devaluing the business long term. That is rather an insulting view of the board's abilities going forwards!

SNOOPY

[percy]

It may be the truth of the matter.?
I am jolly sure one needs user contracts in place,rather than build in hope.!
Did not work for [my grandfather was a ship's captain] Sundstrum,and will not work for "our Pete".

[Marilyn Munroe]

I am jolly sure one needs user contracts in place,rather than build in hope.

Long term contracts between shippers and shipping companies have a history that could be charitably described as mixed.

I am not saying these contracts are entered into with same level of cynicism as the Hitler Stalin pact, but they tend to fall over when the advantage between players shifts.

Boop boop de do
Marilyn

[percy]

Long term contracts between shippers and shipping companies have a history that could be charitably described as mixed.

I am not saying these contracts are entered into with same level of cynicism as the Hitler Stalin pact, but they tend to fall over when the advantage between players shifts.

Boop boop de do
Marilyn

They did not fall over when LPC was run by Dr. Layton and David Vials.
POT don't appear to have the problem either.

[percy]

It may be the truth of the matter.?
I am jolly sure one needs user contracts in place,rather than build in hope.!
Did not work for [my grandfather was a ship's captain] Sundstrum,and will not work for "our Pete".

Received POT's annual report today.
"Our new agreement with Kotahi has secured the future of our South Island operations and given us the confidence to further progress our expansion plans at Tauranga."

[percy]

Anyone wanting to know what the future holds for port companies will find out for themselves by reading POT's annual report.
phone 07 572 8899 and ask for a copy,or email ;marketing@port-tauranga.co.nz

[Snoopy]

Received POT's annual report today.
"Our new agreement with Kotahi has secured the future of our South Island operations and given us the confidence to further progress our expansion plans at Tauranga."

Northingtons have already made sure we LPC shareholders are right up to date Percy: From p13 of the independent Advisor's report:

Key aspects of the Kotahi agreement, together with a separate long term agreement between Kotahi and Maersk Line (the world's largest container shipping company) are as follows:

1/ Kotahi has committed to provide 1.8m TEU export cargo containers to the Port of Tauranga over the next ten years, commencing 1st August 2014.
2/ Kotahi has committed significant export cargo to Timaru Container Terminal Limited ("TCTL") for the next ten years commencing 1 August 2014.
3/ The Port of Tauranga has committed to investment in infrastructure to enable visits from larger 6,500 TEU container ships within the next few years.
4/ Port of Tauranga will subject to certain conditions issue shares to Kotahi, and Kotahi will take a stake in TCTL; and
5/ Kotahi has committed to provide up to 2.5m TEU export cargo containers to Maersk Line for the next 10 years, commencing 1 August 2014.

(Kotahi is jointly owned by Fonterra and Silver Fern Farms)

If my subtraction is correct, then looking at points 1 and 5 means that Kotahi will be shipping 0.7m TEU export cargo through Primeport Timaru over the next ten years. That is 0.7m TEU that would otherwise have gone through Lyttelton or Otago.

SNOOPY

[percy]

What I find a comfort is POT have contracts in place before they commit capital,while LPC commits capital in hope?!

[Snoopy]

The asset value question has prompted a market response from LPCs Chairman.

-----

12 September 2014
NZX RELEASE: MESSAGE FROM LPC CHAIRMAN

The Lyttelton Port of Christchurch (LPC) Board has received enquiries about whether the net asset value contained in LPC's 2014 Annual Report should have been compared to the valuation used in the Independent Adviser's Report prepared by Northington Partners Limited, dated 2 September 2014. The Board raised this question with Northington Partners who have noted the following:

[i]Our assessed value for LPC is based on the business’ future earnings capacity. This approach reflects that LPC will continue to operate as a port business and that its current value is a function of future trade volumes, revenues and net earnings. Importantly, our value assessment also reflects the fact that the Company needs to invest over $500m in the next 10 years to rebuild the basic port infrastructure that is needed to service the business volumes that are incorporated into our financial projections.

The net assets value reported for LPC as at 30 June 2014 is at a historically high level because of the $322m cash balance arising from the insurance settlement received in February 2014. This cash is however clearly not a “surplus” asset; the cash represents pre-funding for the capital expenditure program needed to rebuild the port infrastructure and support future business operations –it is not a separate realisable asset that can be added to the underlying business value.

I have been reading the latest version of the Takeovers code.

http://www.legislation.govt.nz/regul...rder_resel&p=1

Section 20 is on asset valuation and reads as follows:

----

20 Asset valuation

If any information provided in the target company statement
refers to a valuation of any asset,—
(a) the date of the valuation, the identity of the valuer, and
a summary of the valuation, that discloses the basis of computation and the key assumptions on which the
valuation is based; and
(b) an address or addresses where copies of the valuation
are available for inspection and a statement that a copy
of the valuation will be sent to any offeree on request.
87

-----

The original Northington report was compliant with the code in not mentioning asset values, which therefore absolved them of mentioning how assets should be fairly valued.

Section 21 is on prospective financial information and has similar wording

------

21 Prospective financial information
If any information provided in the target company statement
refers to prospective financial information, the principal assumptions on which the prospective financial information is based.

-------

I contend that no-one would attempt to value a company without looking at prospective financial information. Similarly I don't think that those who wrote the takeovers code would have contemplated valuing a company without looking at the asset values. Yet there is nothing in the takeovers code that says you must consider asset values and prospective financial information. It seems it would be quite legal to value a company and leave out both.

The code only requires the independent advisor to investigate the 'merits' of the offer. 'Merits' is not defined specifically. But I do note 'merits' is a plural word, and that implies more that than one measuring stick of valuation should be used.

So, why would the code go into similar detail on 'asset valuation' and 'prospective financial information' if they assumed that only one of those valuation methods was going to be used?

The net assets value of a business reported in its financial statements is very rarely a useful indicator of the fair market value of the business, and is only potentially relevant when:

Liquidating the business is a sensible strategy, and the assets can be physically and economically separated and sold; and Recorded book values are based on updated market valuations which reflect separate sale.

Neither criterion is satisfied for LPC.
<snip>

This last paragraph, as an explanation by Northingtons, I find unfathomable. If the cash value of business assets is $5, and the assessed high value of the business after the rebuild is complete is $3.65, isn't the only sensible action to liquidate?

Likewise, what easier way is there to economically split assets when the majority of those assets are just cash sitting in your bank account? Finally wasn't the LPC insurance pay-out entirely based on market valuations (replacement values) that are right up to date?

It looks to me as though both criteria are satisfied almost perfectly. It is unfathomable to me that the directors have agreed with Northington's opposite conclusion.

SNOOPY

[percy]

I guess you would do the same as me if you owned LPC 100%;take the cash,then put the port business either up for sale/lease as is where is?