Port of Tauranga’s rare bloody nose

Late last year it seemed Port of Tauranga [NZX: POT] could do no wrong.

The listed company – 55%-controlled by Bay of Plenty Regional Council – shed its 50% stake in marshalling and stevedoring business C3 for $70 million in November and then, a month later, spent about half that on acquiring log marshalling and scaling business Quality Marshalling.

The market seemed to approve, as did analysts.

Between early November, when it announced the C3 sell-off, and mid-February, when the company announced another record half-year profit, the company’s share price (NZX: POT) had risen 7%.

A Forsyth Barr research note, written on February 21, described the Quality Marshalling acquisition as a “sensible strategic move”.

And so it seemed, until earlier this week.

Port of Tauranga announced on Tuesday Quality Marshalling – which it only took over in February – had lost a major log marshalling contract from next year, which accounted for 60% of its revenue.

Some analysts are already calling it Port of Tauranga’s “Wim Bosman” – after transport and logistics firm Mainfreight’s trouble after its recently-acquired European arm lost a key customer.

Port of Tauranga's chief financial officer Steve Gray told NBR ONLINE it was aware of the contract renewal when it agreed to buy Quality Marshalling last year and it was a “business risk”.

The $11 million a year contract represented about 4% of Port of Tauranga’s after-tax net profit.

Predictably, the market punished the company, with shares slipping 6% over two days. That drop, before a bounce-back on Thursday, wiped $114 million off the company’s market capitalisation – more than three times Port of Tauranga’s purchase price for Quality Marshalling.

'We will recover'
The company is putting on a brave face. Mr Gray says it will recover from this knock and the company will expand its range of contracts.

But it seems the contract loss broadsided Port of Tauranga, the market and analysts, resulting in a rare bloody nose for a company that is renowned for strong management, operational excellence, good returns and a conservative balance sheet.

Does this raise questions about Port of Tauranga’s other recent moves, such as its proposal to buy into Timaru’s PrimePort?

The company has historically traded at a material premium to the market, but should it continue to do so?

Is this a potential weakness rival Ports of Auckland might exploit?

NBR ONLINE interviewed two broking firm analysts, who spoke on condition of anonymity.

One analyst says the contract loss so soon after acquisition did not reflect well on Port of Tauranga’s management.

“I think they have to be disappointed they’ve lost a significant contract for a business they’ve held for a little over six months when around 70% of the acquisition price was goodwill.

“It’s staggering.”

One conclusion to draw, the analyst says, is that Port of Tauranga-owned Quality Marshalling was lazy and comfortable about the renewal – for Kaingaroa Timberlands and Pacific Forest Products work at central North Island forest Murupara and Mount Maunganui – given the company held the contract for eight years.

But it’s hard to be definitive, he says, unless one knew what the winning bid price was by rival ISO and the differential between the two.

“Contracts will come and go but the high risk nature of QM is characterised by the fact that just one contract is 60% of its business.

“There is the opportunity for them to pick up new contracts and tender for those and they’ll be doing that reasonably aggressively, I suspect, but at lower margin than what they would have anticipated at the time of the acquisition.

The analyst adds: “I suspect this had detrimental impact on industry margins.”

Ironically, the company which runs the contract for the other 40% of the logs going through Port of Tauranga is C3.

Not a good look
Port of Tauranga is understood to have earmarked Quality Marshalling for expansion, within New Zealand and possible into Australia. It’s unclear what this week’s setback will mean for those plans.

As to the wider ramifications of the Quality Marshalling disappointment, the analyst says it’s hard to link management’s mis-step with other recent plans, such as those for PrimePort.

“But it’s not a good look,” he concludes.

Another analyst told NBR ONLINE the situation was “very un-Port of Tauranga like”.

“When they bought it I think there was an expectation they would, rather than lose contracts, add contracts.

“They’ve obviously got a bit of a bloody nose on this, and a bit of embarrassment, and obviously pencils are going to be sharpened.”

Writedowns in Quality Marshalling are unlikely at next year’s interim result, he says, but there may need to be writedowns at some stage, if other contracts are not found.

“You’re talking about a business that’s gone from $7-8 million EBITDA (earnings before interest, tax, depreciation and amortisation) to $2.5-3 million.

“What did seem like a well-priced contracting business is all of a sudden looking quite expensive, unless they replace that contract.”

He describes the mishap as a hiccup.

“I don’t think you can say they took their eye off the ball – it’s just what happens in contracting businesses. There are risks, but we’re more used to them gaining stuff than losing it.”

Tauranga has lost some container business to Ports of Auckland, although he says that seems to be a correction after the southern port’s gain during Auckland’s industrial strife.

Auckland is yet to solve its industrial stand-off, despite the intervention of government-led “facilitation”, and there is a public debate about its expansion plans into Waitemata Harbour.

That leaves Tauranga in a strong position, the analyst says.

dwilliams@nbr.co.nz