Napier Port's $173m-$190m wharf expansion programme is targeted for completion in 2022. Photo / Supplied
NZX directors should be toasting Napier Port with French champagne following the release of the company's IPO documents this week.
After the embarrassing Cannasouth IPO last month, the exchange's first IPO in two years, the domestic sharemarket can finally welcome a company with a genuine business model and positive earnings.
The big questions are: will there be many shares available for New Zealand investors and will the new listing be as successful as Port of Tauranga?
New Zealand has 10 major ports, with Port of Tauranga being the largest and Ports of Auckland in second place but falling further and further behind.
Port of Tauranga accounts for 44.2 per cent of the country's FOB (free on board) seaport exports and 18.6 per cent of imports on a CIF (cost, insurance and freight) basis.
Meanwhile, Ports of Auckland has 12.6 per cent of sea exports and 51.4 per cent of imports.
Napier Port is the third largest in terms of container and bulk carrier visits, the fifth largest in terms of FOB exports and the sixth largest in terms of imports.
NZX investors are familiar with the port sector as Ports of Auckland and Lyttelton Port were both listed until they were 100 per cent acquired by local councils, while Port of Tauranga, South Port and Northport remain listed. The latter operates under the Marsden Maritime Holdings name.
Port of Tauranga has been a sensational success as illustrated by the following figures:
• The Mount Maunganui-based company issued shares to the public at $1.05 each in 1992 and these shares are now trading at $6.12
• However, original investors now have 875 shares for every 100 shares purchased in the IPO after a 1-for-8 capital repayment in 2001/2, which has been followed by 2-for-1 and 5-for-1 share splits. Accordingly, each $1.05 share issued in 1992 is now worth $53.55 after taking these share changes into account
• The Bay of Plenty Regional Council owns 54.1 per cent of the company, which has a current market value of $2.247m compared with only $44 million in 1992
• In addition, the council has received dividends of $584m and a capital repayment of $37m, a total of $621m.
Thus, in the past 27 years the Bay of Plenty Regional Council has converted $44m worth of Port of Tauranga shares into $2.878m.
Investors who purchased 10,000 shares in the original IPO, at a cost of just $10,500, would have achieved the same result. This $10,500 investment is now worth $687,000, including dividends and a capital repayment.
Hawke's Bay Regional Council is hoping it can achieve the same outcome with Napier Port.
The IPO will involve the sale of 90 million Napier Port shares, representing 45 per cent of the company, while the regional council will hold the remaining 55 per cent.
The IPO price, which has an indicative range between $2.27 and $2.60 a share, will be determined through a bookbuild process in the first week in August.
The $204.3m to $234.0m realisation from the 90 million share sale will be distributed as follows:
• $110.2m will be used to repay Napier Port's bank debt
• $13.7m-$14.3m will pay for the IPO costs
• $1.7m will fund loans to employees to purchase Napier Port shares
• $78.7m-$107.9m will go to the Hawke's Bay Regional Council.
The IPO shares will be offered to "selected institutional investors in New Zealand, Australia and certain eligible institutional investors outside New Zealand" as well as to clients of "selected NZX firms".
The word "selected" has annoyed potential New Zealand investors, particularly when they have been told their applications will be scaled back.
Many potential investors were also annoyed to read in the Australian Financial Review (AFR) this week that joint lead manager Goldman Sachs was in Australia promoting the IPO. The AFR reported that lead managers "will be trying to drag some Aussies into the IPO, to at least make sure New Zealand's domestic funds don't get the port on the cheap".
This comment referred to the bookbuild process whereby institutional bids set the IPO price.
In addition, priority will be given to Napier Port employees, Hawke's Bay residents and eligible iwi.
We have come a long way since 1992, when a New Zealand broker organised the Port of Tauranga IPO for a total cost of only $950,000. Nearly three decades later, Napier Port has engaged global giants Goldman Sachs, and troubled German bank Deutsche, and we now have estimated IPO costs in the $13.7m to $14.3m range.
Port of Tauranga's IPO price was fixed at $1.05 a share 27 years ago and there was no mention of Australian institutions, while we now have an indicative price range, an institutional bookbuild and Aussie institutions being lobbied to participate in the process to help boost the IPO price.
Obviously, conditions were totally different in the early 1990s in the aftermath of the 1987 crash, when there was no Australian compulsory superannuation and KiwiSaver was more than a decade away.
In the year prior to its IPO, Port of Tauranga reported earnings before interest and tax (Ebit) of $16.2m on revenue of $30.3m, while last year Napier Port reported Ebit of $28.5m on revenue of $91.7m.
Meanwhile, Port of Tauranga had a market value of $79m at its $1.05 IPO price while Napier Port will have a market value between $454m and $520m at its indicative IPO price range.
These figures clearly indicate that Port of Tauranga was totally undervalued at its IPO price whereas Napier Port is more realistically valued.
In addition, infrastructure wasn't sexy in the early 1990s and investors didn't anticipate that the governance and management of the Bay of Plenty port company would be as good as it has been.
Port of Tauranga has industry-high Ebit margins and has also benefited from the poor governance of Ports of Auckland under public ownership. The strong performance of the Mount Maunganui company, particularly compared with Ports of Auckland, is illustrated in the accompanying table.
The key to Napier Port's success will be its new $173m-$190m wharf expansion programme, which has a 2022 target completion date. The multi-purpose 350 metre wharf, which will be located along the northern face of the existing container terminal, will reduce congestion, expand the port's container capacity and enable it to handle larger vessels.
Ironically, most institutional investors shunned the Port of Tauranga IPO because they were concerned that the massive Sulphur Point development, on the Tauranga side of the harbour, would be a major white elephant.
Sulphur Point was opened shortly after the Mount Maunganui company listed on the NZX and now makes a significant contribution to the port company, particularly its container handling activities.
The long-term performance of Napier Port will be strongly influenced by its major wharf expansion programme, the growth in exports from the Hawke's Bay region and the company's ability to attract this expanding export traffic.
The move from public ownership to listing should also help, but the company will need top-class governance and management to achieve its goals.
Finally, Napier Port directors and management should be wary of the lead managers' efforts to attract Aussie institutions because these investors can be extremely aggressive and can consume considerable board and management time, if the Hawke's Bay port company fails to deliver in terms of earnings and dividend growth.
- Brian Gaynor is a director of Milford Asset Management.
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