Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: Universal secret of success fuels port

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Photo / APN
Photo / APN

Why are some companies extremely successful while others operating in the same industry struggle?

The port industry is a good example of this phenomenon - Port of Tauranga has delivered fantastic sharemarket returns; Lyttelton Port, Northland Port Corporation and South Port NZ have been disappointing.

Many will say Port of Tauranga has a great location, and there is limited international trade in the Marsden Point, Lyttelton and Bluff areas.

This sounds logical, but when Port of Tauranga was listed it was less valuable than Lyttelton Port and investors had a negative view of the Mount Maunganui operation.

Port of Tauranga has made huge progress over the past 20 years in the face of fierce competition from Ports of Auckland, whereas the two South Island listed ports have had more limited competition.

Port of Tauranga's huge success has been due to much more than location.

The port industry was restructured under the Port Companies Act 1988 which required the old harbour boards to transfer their commercial operations to limited liability companies. Most of these new entities were owned by local regional councils.

Before the 1988 act the New Zealand waterfront was hopelessly inefficient because it operated under monopolies:

Harbour boards had the sole right to own and supply plant used for moving cargo.

Harbour workers had the exclusive right to operate this plant.

Only Waterside Workers Union members could work on the ships.

Then-Transport Minister Bill Jeffries said: "The port industry is too expensive and the country does not get the value it should from the enormous capital and labour costs that the port sector generates."

There was a dramatic increase in port productivity after the Port Companies Act 1988 and Waterfront Industrial Reform Act 1989 were enacted. The number of waterfront workers went from 3300 to 1800, and the average turnaround time for a container vessel at Ports of Auckland fell from 38 hours to 15.5 hours, even though each ship, on average, had twice as many containers as ships handled under the old system.

Port of Tauranga was the first to seek stock exchange listing when the Waikato Regional Council offered 12.6 million shares for sale, and the company issued 10 million new shares at $1.05 each in April 1992. The new shares represented 26.7 per cent of the increased capital.

There was little interest in Port of Tauranga's IPO, partly because the highly regarded Progressive Enterprises was also raising money through an IPO at the time.

Investors were extremely critical of the new Sulphur Point wharf facilities which were to be completed in April 1992.

But investors completely underestimated the potential of the Mount Maunganui port in 1992, as the company's sharemarket value has soared 23.1 times since listing. This compares with value increases of between two and three times for the other listed port companies.

The Mount Maunganui company also substantially outperformed Progressive Enterprises in sharemarket returns.

Port of Tauranga could easily have been swamped by Ports of Auckland, but it has been a more effective operator than its neighbour, mainly because it has had good industrial relations, strong boards, aggressive senior management and a well-thought out and executed growth strategy.

Northland Port was the next off the block when the Northland Regional Council sold 10 million shares, representing 24.1 per cent of the company, for $1.25 a share in September 1992.

The company provided ship handling and services to the New Zealand Refining jetty at Marsden Point and at Port Whangarei.

In 2002 the port activities at Marsden Point and Port Whangarei were transferred to Northport, a 50/50 joint venture between Northland Port Corporation and Port of Tauranga. In 2007 Port Whangarei was closed to commercial shipping.

Northland Port is now an investment company with 50 per cent shareholdings in Northport, Northland Stevedoring Services and North Port Coldstores (1989).

It has substantially underperformed the NZX in recent years, seems to have no clear strategy and badly needs a shake up. It has eight directors, which is ridiculously high for a small investment company, and they are asking for another fee increase, to $200,000, at the annual meeting on October 18.

Northland Port has an expensive corporate management structure and is constructing a new office building at Marsden Point that chairman Sir John Goulter says "is expected to significantly enhance the company's profile in the area".

The late 1980s port reforms were introduced because of over-manning and poor productivity on the wharves. Northland Port shareholders need to take their company to task because of over-manning at the board table and escalating head office costs.

Ports of Auckland had the next IPO, in September 1993, when the Waikato Regional Council sold 39.8 million shares, or 20 per cent of the company, at $1.60 a share.

Twelve years later, the company was worth $848 million when Auckland Regional Holdings made a successful takeover offer at $8 a share. It had repaid capital in the intervening period, mainly from proceeds from the sale of the Viaduct Harbour area and the Westhaven and Hobson West marinas. The Auckland company has not been a huge success since the 2005 takeover.

Its net earnings have fallen from $57.2 million in 2004 to $38.9 million in the June 2013 year. Port of Tauranga's net earnings have soared from $33.7 million to $77.2 million over the same period.

South Port listed in 1994 and Lyttelton Port two years later.

The Southland Regional Council sold 6.48 million South Port shares, or 20 per cent of the company, at $1.10 a share in June 1994.

South Port has struggled since then, reporting net earnings of $6.7 million for the June 2013 year compared with $5.5 million for its 1992/93 financial year.

The company's largest customer is the Tiwai Point aluminium smelter, which is operating at 15 per cent below its normal capacity. Closure of the smelter would have a serious effect on South Port.

Lyttelton Port listed in 1996 after the sale of 19 million $1 shares, representing 18.8 per cent of the company, by three local councils.

Christchurch City Holdings, which now owns 79.6 per cent, made an unsuccessful takeover offer at $2.20 a share in 2006.

Lyttelton Port has been affected by the 2010 and 2011 earthquakes but it hopes to resume paying dividends in the first half of next year.

The 1980s reforms gave port companies great operating opportunities in terms of operating efficiencies and most ended up with surplus property or prospects to reclaim land from the sea.

Port of Tauranga was the only company to raise new capital, indicating that it had a clear growth plan, whereas the other four were sell downs by existing shareholders.

The Mount Maunganui company has taken advantage of the port reforms and this can be clearly put down to the company's strong board, which has always had several successful businesspeople as directors. It has also had aggressive and effective management and a well-executed growth strategy.

These are the most important features of any growth company, no matter what industry it operates in.

Brian Gaynor is an executive director of Milford Asset Management, which holds shares in Port of Tauranga on behalf of clients.

- NZ Herald

Brian Gaynor

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the Financial Markets Authority (FMA) in 2011. He is also a Portfolio Manager at Milford Asset Management.

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