AUCKLAND'S PORT: SICKLY GOLDEN GOOSE
9 October 2008Jenny Ruth
Blind adherence to ideology of any stripe gives Chalkie a headache: she'd prefer pragmatism any day.
In 2005, Auckland Regional Council (ARC) chairman Michael Lee made a song and dance about the virtues of Ports of Auckland (POA) returning to full public ownership after the council took out the 20% minorities and delisted it after 12 years on the stock exchange.
The takeover was "momentous and a vindication of those who fought so hard against privatisation in the early 1990s", Lee said.
"The Ports of Auckland will be a prized legacy for future generations and the wealth generated will be vital for funding Auckland's infrastructure for years to come," Lee said.
He also pontificated about how the port company would be better off not having to consider the interests of minority shareholders. Looking at how POA has performed since then, Chalkie reckons Auckland ratepayers ought to be spitting chips.
When ARC launched the bid in April 2005, one analyst said the port company would need to make a $62 million annual profit to cover its cost of capital. At the $8 a share bid price, the 20% stake was worth $170 million.
Since the last published result then for the year ended June 2004 was $57.2 million, that didn't look like too much of a stretch. But try this for size -- in the June 2008 year POA posted a mere $21.1 million profit.
The bottom line results are distorted by the company's property dealings but its operating earnings from port operations alone have also been deteriorating, falling from $63.2 million in 2004 to $52.8 million this year.
That's despite container throughput growing 27% in the same period.
POA, as Lee made clear, is supposed to be a cash cow for ARC to milk to fund transport and stormwater infrastructure.
Until now its dividend stream has been handsome. In its last year as a public company, ARC's share of Ports of Auckland's dividends was $34.3 million, up from $28.8 million in 2004.
The payout in 2006, including a special dividend, was $151.8 million and ARC received $19.9 million in cash in 2007 on top of the port company transferring its Tank Farm, or western reclamation, property assets to ARC. These assets were valued at $284 million at the time of transfer in April 2007. An additional $5.6 million in waterfront property was transferred to ARC in August 2007. It was widely thought at the time of the takeover it was this land ARC was really interested in gaining control of rather than the port company itself.
This year P0A paid ARC $22.7 million, $1.6 million more than it earned.
But it looks as if the cash cow is starting to dry up. ARC's investment management arm, Auckland Regional Holdings (ARH), prepares a 10-year funding plan every year.
This year's plan shows it expects to receive $175 million in dividends from the port company between 2008 and 2018.
Last year it was expecting $275 million for the 10 years to 2017.
ARH said this massive drop in expectations reflected the port company "facing a very tight trading environment with lower economic activity and reduced growth in container and break bulk volume. This is expected to continue for some time".
But the 2007 forecast was also down from the 2006 projection of $383 million for the 10 years to 2016.
That year ARH explained the drop as reflecting the transfer of the Tank Farm property: "This loss in dividends is expected to be compensated for long term by the expected operating gains to be made as a result of ARH owning the waterfront properties directly."
In 2005, ahead of the takeover, it was expecting $432 million up to 2015. ARH has maintained its expectation that its total return, dividends plus capital gains, from the ports company will be 8% a year over each of these 10 year periods.
Time for a reality check, and what better one than Ports of Auckland's arch rival, Port of Tauranga (POT)?
Surprise, surprise, in ARH's "very tight trading environment" the Tauranga port's net profit was double Auckland's at $41.1 million.
Its fortunes over the five years have been a bit up and down as it lost shipping services to Auckland, but this year's result was up from $39.3 million last year and compares with $33.7 million in the year ended June 2004.
It's hugely ironic that, when releasing POA's results, managing director Jens Madsen suggested his company would like to buy Tauranga's container business.
Sure, Auckland's container business has grown 27% since 2004. But Tauranga's has grown 47.6%.
In other words, Auckland's growth has been at the expense of profits but Tauranga has managed to increase throughput and make higher profits.
Which makes Chalkie wonder about those capital gains ARH is expecting from POA. ARH hasn't released its full year results yet but in April it forecast the port company would be worth $591 million at June 30 this year, up from $587.8 million at December 31, 2007.
ARH valued the port company at $747.8 million in 2005, including the property assets. Using the 2007 valuations, that means ARH thinks the port company's worth has climbed to $880.6 million over the four years. When earnings have been declining and are projected to fall further?
If POA were still listed would its share price be rising or falling? Interestingly, POT is currently one of the market's best performers. Last Friday, its share price was down about 1% from a year earlier compared with the benchmark Top 50 Index's 27% decline. At the $6.90 share price on Friday the market was valuing it at $924.8 million. Despite that deteriorating economic outlook ARH talks about. POT's comment about the outlook in its annual report is that "2009 will likely bring considerable challenges, but, given our strong balance sheet, operating efficiency and the port's diverse cargoes we are well-placed to ride out the uncertain short term while preparing for the positive longer one".
By contrast POA's balance sheet is considerably weaker now. Back June 2004, when it still had its property assets, the company's term debt was $146.4 million. In June this year term debt had ballooned to $355.4 million.
Tauranga's was $202 million at the same date, its debt to debt-to-equity ratio at 29% compared with Auckland's 52%.
An analysis by ABN Amro finds it makes no sense that POT is more profitable than POA given Tauranga's rail costs between its Metroport in South Auckland and the main Tauranga operation. The broker estimates this at about $25 million in the June year. "Despite this cost burden POT still has an Ebitda (earnings before interest, tax, depreciation and amortisation) margin of 53.3% compared to 41.7% for POA, a reflection of its operating efficiency and greater proportion of high margin break-bulk volumes.
"Putting rail costs to one side, one of the key differences driving the lower Ebitda margin for POA is the massive quantum of annual labour costs for POA; $54 million compared to POT with $16 million (we are uncertain what POA's $21 million of administration costs relate to and whether they contain further labour costs)."
ABN Amro expects POA will have capacity issues within two or three years which will require significant capital spending "that its current balance sheet structure appears unable to accommodate (without, at the least, a material reduction in dividends)".
The broker believes there's a "union stranglehold over POA" making its labour costs prohibitive. Rather than buying POT's container business, it suggests POA ought to be considering an alternative operating structure such as selling the right to operate its container business on one of its wharves to raise capital and drive down operating costs. Auckland ratepayers, don't hold your breath.
(c) 2008 The Independent Business Weekly
The Independent Financial Review
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