Diversified trades cushion South Port

South Port New Zealand’s strategy of diversifying earning streams has protected the Company’s revenue from adverse economic cycles.

The Chairman, Mr Rex Chapman told shareholders attending the Annual Meeting in Bluff today, the 2015 result is "particularly pleasing because this time last year we did not predict such a good result, given the growing competitive pressure in container activity and falling commodity prices."

South Port has earlier reported another record cargo throughput at Bluff of 2.68 million tonnes, a 5% increase on 2014, which resulted in another record net profit after tax of $7.7 million, up 15% on 2014.

The Company has diversified across container and bulk cargoes transfers, warehousing, cold storage, property and infrastructure leasing and this has been rewarded.

Stronger-than-expected volumes of imported bulk cargos, notably of stock food and fertiliser, contributed to the record performance. "We were pleasantly surprised that these particular cargos held up so well in such a difficult period for the dairy sector."

Mr Chapman said, "Over the last five years, South Port has steadily increased dividends from 20 cents per share to 24 cents per share. Since listing in 1994, the Company has delivered about $165 million to shareholders through share price appreciation and annual dividends."

South Port’s strategy is to maintain good working relationships with all of the New Zealand ports in order to take advantage of "inevitable changes" in the port sector.

"Just as Tauranga has now reached into the South Island through Timaru, it is expected that other ports will be seeking to enter into working relationships with one another in order to capture regional cargo outside of their immediate catchment area."

New supply chain agreements such as that between Kotahi and Port of Tauranga have triggered "intense competition between shipping companies for the remaining cargo and shipping rates are at unsustainably low levels," said Mr Chapman.

Some New Zealand ports were undertaking dredging to ensure they could accept larger container vessels up to 6,500 TEU in capacity.

"This will mean that the ports, at which larger vessels will call, will have to look beyond their own backyard for containerised cargo to fill the vessels. Inland ports and freight centres are the key to aggregating this cargo."

INLAND FREIGHT HUB

He confirmed that South Port is advancing plans for an inland facility, as signalled at last year’s annual meeting.

"The facility, to be known as the Invercargill Freight Centre (IF), might be ‘modest by comparison’ to similar developments in other provinces; however, it is an important development being provided in response to changes in the supply chain landscape", said Mr Chapman, "and could lead to further commercial opportunities."

As well as providing a cost competitive and efficient import-export service for the southern region, the IFC would further diversify South Port’s earnings. Construction is to start this summer, on a 0.80 ha. site in Mersey Street, Invercargill, adjacent to the KiwiRail rail-head, with the target of a July 2016 completion date.

South Port’s container shipping customer MSC faces competitive pressure to retain and attract cargo out of Bluff and the Port operator is working closely with the shipping line to support continuation of its call at Bluff.

South Port had invested $6.5 million in capital expenditure to retain the MSC connection. Chief Executive, Mark O’Connor said, "the second crane model has improved Port productivity and the five year target was 50,000 TEU annual throughput."

Over a 7-year period the cargo profile has grown by 54% and that translated to a sustained lift in profitability in that same time frame. Assets utilised have grown by 47% in the same period.

The dairy sector brought many spin-offs across imports of fuel, fertiliser, bulk liquids and raw materials plus exports of finished product.

Rayonier resumed the direct export of logs in 2015 and there is a likelihood of forestry growth. However, while the prospects for Great South Basin oil and gas exploration remain positive, activity is delayed by the weak global energy market.

The potential outlook for the NZAS aluminium trade has improved with greater certainty about the ongoing activity at Tiwai Point following the August 2015 negotiation between NZAS and the Smelter’s energy supplier Meridian Energy. Despite having to manage a low point in the aluminium commodity cycle, this means that the Smelter’s owners and management have a focus on an operating period out to 2030 rather than 2017. Further necessary value could be secured through a revised electricity distribution pricing model.

OUTLOOK

"With just over a quarter of the FY16 year completed and at the start of the export season, it is difficult to predict what lies ahead for the current year", said Mr Chapman.

"The FY15 record result underscores the contribution from bulk cargoes, several aligned to the dairy sector", he said. "It has been a relief to see recent gains in the GlobalDairyTrade auction price, which will hopefully lead to the milk price forecast moving back above $5/kgMS. The low pay out is expected to result in a 5-10% drop in annual milk supply this season."

The effects of the lower pay out on stock food import volumes are unclear. The use of supplementary feed in Southland is lower than in other provinces and volumes may be less affected.

Log export activity is consistent and could expand over the next few years, assisted by larger harvests, opening of new markets, a lower currency and low freight rates.

With market conditions more subdued, the Company is forecasting a slightly lower level of net profit for FY16. An update on earnings guidance will be provided when the 2016 interim result is released.