Return on capital at NZ ports has been under pressure for more than a decade.
Return on capital at NZ ports has been under pressure for more than a decade.
The New Zealand port sector is not earning anywhere near its cost of capital and user pricing must be the remedy to lift returns to adequate levels, a new report from Forsyth Barr says.
Return on capital across the sector showed an “alarming” trend over the past 10-plus years withaverage returns falling by around one third as measured on a median or mean basis, said the report by transport sector analysts Andy Bowley and Hugh Lockwood.
Ports were displaying “more rational” pricing behaviour but only through necessity, they said.
Their report’s observations include NZX-listed Port of Tauranga, Napier Port, and Auckland Council-owned Port of Auckland.
“The sector as a whole is not earning anywhere near its cost of capital. The results diminution is exacerbated by asset revaluations for some ports, but even excluding revaluations, industry returns have declined on average.”
Factors contributing to the unfavourable financial backdrop included council ownership of ports, poor capital allocation, elevated cost inflation, and “an apparent unwillingness to take advantage of the sector’s inherent pricing power”.
“The latter does appear to be changing with new pricing practices being installed and a general desire by port owners and management teams to lift returns.
“Our earnings forecasts for POT (Tauranga) and NPH (Napier) imply increasing returns on their respective revalued asset bases to above cost of capital levels over the medium term,” the analysts said.
Ports in recent years had reacted “en masse” to cost inflation to preserve profitability but had failed to manage margin pressures.
“Although return on capital appears to have troughed, industry pricing must continue to lift returns to adequate levels.
“Ports are real businesses that should generate appropriate returns, yet few do in New Zealand. We are confident that the sector’s outlook is positive, with ports increasingly actioning new pricing initiatives - for example infrastructure levies and vehicle booking systems/access fees - to assist financial performance.”
Ports are "real businesses" that should generate appropriate returns, says Forsyth Barr. Photo / Michael Craig
The report said despite the change in pricing behaviour, industry pricing still remained substantially lower than in Australia, where the advent of terminal access charges in recent years had dramatically changed the landscape.
The one third fall in average returns identified in the report translated to pre-tax return falling from 11.2% in FY14 to 7.7% in FY24.
“Our measure of return on capital is based on revalued asset bases, where revaluations are part of a port’s accounting policies. Most ports revalue their respective asset bases, with a few exceptions, including Lyttelton and Southport.
“Revaluations depress return on capital in two ways: first, they increase the capital base of the business. Second, they add to the depreciation burden and therefore negatively impact profitability.
“However, our in-depth analysis of revaluations across ports suggest that even if ports didn’t revalue their assets, the return on capital profile of the past decade would still appear underwhelming.”
The disappointing trend in port company returns on capital in the past 10-plus years included Port of Tauranga and Napier Port.
Pricing was the remedy for the problem, said the report.
Price increases across ports over the past three years had been necessary given higher cost inflation.
The unit profits of ports had increased from the Covid low of FY21 but in real terms were lower now than in FY13. Elevated cost inflation had been largely due to a shortage of skilled labour, insurance premiums and rates.
Terminal access charges were a largely untapped opportunities for New Zealand ports, the report said.
“Vehicle booking system (VBS) charges were first levied by New Zealand ports as a means of creating structure to the flow of trucks to and from ports in order to reduce congestion.
“Charges were set at modest levels. More recently, VBS charges have been used as a revenue driver, particularly by POAL (Port of Auckland). While VBS is still commonly used to refer to these types of charges, they are effectively port or terminal access fees, similar to the approach used by Australian stevedoring companies (the port operators) in recent years.
“Access fees can be applied to both container and bulk cargo, and to trucks and rail services. They are typically levied to the transport operator, not the cargo owner or the shipping line. This typically improves the port’s bargaining position vs traditional pricing measures (i.e. wharfage charged to shipping lines).
“An alternative means of price leverage available to ports are infrastructure levies, which have been applied by a number of ports in recent years, including both POT and NPH.”
Forsyth Barr has downgraded its rating on the Tauranga port to “neutral” from “outperform”.
This was to reflect its material recent multiple re-rating.
“While attractive forward earnings growth supports a positive investment outlook for POT, we believe the balance of earnings risk now lies more to the down rather than upside due to elevated port pricing expectations.
“Pricing will be key to improving POT’s profits and return on capital over the medium term, but the risk is that realised pricing takes longer to accrue, lowering POT’s earnings growth trajectory. Management is sensibly downplaying investor optimism over pricing, despite the pricing theme’s increasing relevance to the wider industry.”
