A closer look at Port of Napier’s IPO - Milford Asset

A closer look at Port of Napier’s IPO

Michael Luke

Investment Analyst

Michael joined Milford in November 2016. His role at Milford is to research, meet and analyse a range of companies to identify potential investment opportunities. Michael graduated from the University of Auckland in 2018 with a Bachelor of Commerce, double majoring in Finance & Accounting. Having purchased his first shares at the age of 14, Michael previously managed a private portfolio and investment blog, specialising in small cap stocks across Australia and New Zealand.

Hawke’s Bay Council is selling 45% of Port of Napier through an Initial Public Offering (IPO) on the NZX. The sale will raise $190-$220m of which $110m will go towards the development of a sixth wharf. The remaining $79m to $108m will be returned to the council to be recycled into other projects.

The new 6 Wharf will be 350m long and is expected to solve the congestion issues the port is currently experiencing from growing volumes and larger ships. It is expected to cost $173m-$190m in total with completion expected in 2022. There have been mixed opinions on whether the wharf is needed given the large cost, however, it will future proof the ports ability to berth the larger ships coming to New Zealand.

Regional catchment

Port of Napier is the fourth largest port in New Zealand and its key exports include forestry products, pip fruit and other local produce.

The port has an attractive catchment in the Hawke’s Bay region, with roughly 85% of cargo coming from within 100 km. Due to the region’s geographic isolation, there is a very high cost of transporting cargo to alternative ports, providing the port with a strong competitive advantage.

This regional catchment offers good medium-term growth opportunities from forestry and pip fruit growth.

Source: Napier Port Presentation

New Opportunities

Port of Tauranga (POT) has been one of the top performing stocks in our market, and investors will be asking if Port of Napier can be just as successful.

POT has established itself as the hub for NZ exports. A lot of this success can be attributed to its ability to win cargo from other ports through transhipment, where containers from other ports are transferred to POT. Ventures like Kotahi and MetroPort, which bring cargo from around New Zealand to POT via rail have also been very successful.

Port of Napier’s isolation has shielded them from a lot of competition, but it also limits the opportunity for growth outside of the Hawke’s Bay Region. This will be a key focus for management.

Outside of cargo volume, Napier has become an attractive destination for cruises with 87 liners expected to call into the port in 2020, compared to 57 in 2018. The port is currently limiting visits due to congestion which should be resolved by the new 6 Wharf.

Source: Stats NZ, Milford

Forestry

Forestry is Port of Napier’s largest export product by tonnage and biggest earnings exposure, most of this volume is exported to China which has seen significant growth over the past decade driven by their construction boom. As a result, NZ forestry & ports have become highly sensitive to Chinese log demand. While log prices have fallen sharply recently demand indicators still appear strong and nothing has structurally changed in log supply to China.

This fall in prices was driven by a mix of oversupply which should correct, at the same time as seasonally lower construction activity in China due to hotter temperatures. Provided demand remains stable, expectations are for prices to rebound in the next few months.

In the short-term however, if log prices remain subdued, small forestry syndicates may choose to delay harvesting. This has the potential to impact the earnings Port of Napier has outlined in its prospectus.

Source: Stats NZ, Milford

Over the long-term, the outlook for logs in Hawke’s Bay is solid as the “wall of wood” planted in the 1990’s matures for harvest. The below chart shows Radiata Pine availability based on a harvest age of 28 years. This “wall of wood” will be harvested over a longer period (25- 35 age range) due to capacity constraints, which will support a solid base of log volume for the port, assuming demand from China remains solid.

Source: MPI

Overall

The port offers investors exposure to a long-term infrastructure asset, and we are glad to see the port list on the NZX. The Hawke’s Bay catchment provides the port with a solid base of earnings and some growth opportunities. The ultimate success of the port will depend on management’s ability to capitalise on existing opportunities as well as create new ones like Port of Tauranga has done so well.

Disclaimer: This article is intended to provide general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser. Past performance is not a guarantee of future performance.

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