Napier Port IPO — Shallow Waters or Deep Opportunity?

I’ve lived in Auckland for 20 years. It’s damaged me. I generally last three months and then I’m ready to get out again. So last week’s stay on a 2,500 acre sheep-and-cattle farm was restorative.

The busiest view was a paddock of sheep — which quickly moved on. Traffic lights in the distance gave way to clusters of wild deer. And we had venison steaks for dinner — sliced from one shot previous, hanging in the chiller.

Stuck on the Southern Motorway, returning to Auckland, a good part of me yearned to stay in the country. And given recent news, if I had to pick which part, it ought to be the Hawke’s Bay .

Napier Port is going through an IPO for 45% of the company. And unless you live in the Hawke’s Bay or are an existing client with one of the lead retail brokers, it’s looking very difficult to get any meaningful share allocation.

The parochial nature of this IPO is frankly annoying.

So I called one of the lead brokers. And I was advised that existing clients would likely receive a scaled-back offer, with managed account clients having priority.

I’m not a client of the broker. I could become a transactional one. But I got the impression there would be few shares available. As I run other brokerage accounts — would this be worth my time?

Source: Napier Port

What am I actually missing out on?

Despite the excitement of a new IPO on a near-dead NZX for new listings (we covered why the NZX might be struggling in this post) — the Napier Port IPO doesn’t look that exciting.

A friend of mine holds a senior role in the ports industry. He told me over a beer he sees Napier Port having ‘a few potential challenges’.

Most export traffic goes through Tauranga; import traffic goes through Auckland. The Hawke’s Bay is one of the smaller regions by total freight generated.

The disclosure statement for the Napier Port IPO offer points out a number of risks relating to freight in the region. Not least exposure to logging (55% of export products) and Asian markets (84% of export cargo).

Log prices are down recently. Against a flood of cheap logs from Russia and Scandinavia, Kiwi logs are piling up at Chinese ports.

This port’s level of forestry exposure remains a significant concern.

Yet seaports remain valuable infrastructure assets. The Port of Tauranga [NZX:POT] listed quite cheaply some time ago. It made a lucky few some substantial gains. It’s now one of the more expensive stocks in the country, considering P/E.

Port of Tauranga is currently priced at a P/E of around 43. Dividend yield is relatively low.

Morningstar currently has a ‘Sell’ rating on the stock and a valuation of only $4, against the current share price of over $6.

Trophy assets

Perhaps ports like Tauranga are ‘trophy’ assets — like a house in Herne Bay or Devonport. They don’t offer so much in terms of income yield or rapid growth, but they do have unarguable position.

The way in which the Napier Port IPO is offered reflects this position demand. Unfortunately, like many offers in New Zealand, it is highly prized and in short supply. But when value-comparing against other global infrastructure assets, it starts to feel like the hand is being overplayed.

Maybe If I lived in the Hawke’s Bay (or had property there), obtaining a small allocation could be a no-brainer. As I don’t, it looks like there are too many hoops to go through to get what may be a small, scaled-back parcel through one of the retail brokers.

And at the end of the day, Napier is a small port in a not especially prosperous region of the country. New Zealand as a whole showed GDP-per-capita in 2018 of $58,778. The Hawke’s Bay lagged at $48,881.

The IPO itself appears to me to be a no-bargain. The key offer statistics suggests it will be priced within a P/E range of 22.7—26.0 (based on FY2020). With an implied cash dividend yield of 2.9%—3.3%.

At these sorts of numbers, I might be more inclined to top up on other listed infrastructure assets that have P/Es below 20 and dividend streams more generous and proven.

Perceived value

Dear investor, you’ll see this phenomenon more and more as the market continues to heat up against a low interest-rate environment. Sardines will appear as caviar.

Sometimes the perceived value of an asset becomes strategic — over and above what it can deliver by way of income or growth, defying quantitative valuation.

But you must consider with care. Enthusiasm can misprice assets. Fake boobs may fool a shallow glance.

That house I mentioned in Herne Bay may yield less than 2% net if you rent it out. It’s been falling in value with the slowdown of Auckland property. But the position ‘gold’ remains.

Fortunately, there are more profitable investment opportunities.

Still, if you live in the Hawke’s Bay, the Napier Port IPO will likely make sense at some level.

And as you can probably tell, having returned to Auckland, grumpiness has come back.

Stay prosperous.

Regards,

Simon Angelo
Editor, Money Morning New Zealand

The stocks mentioned in this report are examples only. They are not official recommendations.

PS: In our newsletter, Lifetime Wealth Investor, I’m going to share with you my research into the best infrastructure stocks we’re seeing around the world. Stocks that have position value, currently pay dividends and offer capital growth upside. This will be available from Wednesday – so look out for it in tomorrow’s post!


Simon is the editor of Wealth Morning and has been investing in the markets since he was 17. He recently spent a couple of years working in the hedge fund industry in Europe. Before this he owned an award-winning professional services business and online learning company in Auckland for 20 years. He has completed the Certificate in Discretionary Investment Management from the Personal Finance Society (UK), has written a bestselling book and manages global share portfolios.


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