QUALIPORT
Long-Term Safe Havens

By Maynard Paton (TMFMayn)
September 11, 2003

Ports have proven to be great long-term investments. According to ProShare, anybody getting in at the flotation of Forth Ports (LSE: FPT) in 1992 would have seen a 21% per annum compound return. Anybody buying Associated British Ports (LSE: ABP) when it floated in 1983 has since witnessed an 18% average annual gain. And that's before any dividends. Read more.

Though both companies may have been sold off on the cheap, the stable, predictable nature of running a seaport has undoubtedly underpinned the share price performances. You see, ports are long-term safe havens: they tend not to disappear, because newcomers face sizeable planning and geographical restrictions. Read more.

The market's major port operators -- Forth, ABP and Mersey Docks (LSE: MDK) -- published their interim results recently, with all three making steady progress. Of the trio, ABP is the Qualiport's favourite, it being the UK's largest player (handling almost 25% of UK imports) and possessing a boardroom not tempted to expand into other areas.

ABP interims

This table summarises ABP's half-year progress:

Six months to June 30             2003           2002

Turnover (£m)                    195.6          213.7
Operating profit (£m)             83.9           86.7
Exceptional items (£m)             3.5            0.2
Pre-tax profit                    70.1           67.8

Earnings per share (p)            14.6           14.9
Dividend per share (p)             6.75           6.5

(All figures adjusted for goodwill)

Group sales and operating profits declined due to ABP's ongoing exit from property development and other 'non-core' activities. Within the main UK ports business, turnover improved 7% to £172m while operating profits edged 4% higher to £74.5m. The star performer was Southampton, where revenues rose 11% following greater grain exports and higher cruise traffic. UK port operating margins remain a terrific 43%. Read more.

Commendably, ABP reiterated three important points for shareholders: its targeting of a 15%-plus internal rate of investment return, a focus on long-term contracts (currently supporting 50% of turnover), and containing maintenance capital expenditure below the depreciation charge.

Assuming no growth in operating profits, ABP could generate free cash of 29.1p per share during the twelve months ending June 2004. (Although income from ABP's property development and investments is set to fall over the next few years, imminent savings from a corporate restructure should offset the shortfall.) At today's 418p share price, ABP offers a 7.0% free cash flow yield. Demanding a 7.5% yield requires a 388p entry price.

Go Forth

Forth's six-month effort is shown below:

Six months to June 30             2003           2002

Turnover (£m)                     57.6           55.6
Operating profit (£m)             17.4           16.3
Exceptional items (£m)             2.8            2.4
Pre-tax profit                    16.3           14.5

Earnings per share (p)            20.9           18.9
Dividend per share (p)            12.1           11.0

(All figures adjusted for goodwill)

A good performance by Forth, aided by significant progress at Tilbury. Helped by margins improving to 29%, underlying operating profits at the group's ports jumped 20% to £16.7m. Read more.

The only real issue with Forth is its growing involvement in property. The company is busy developing land for commercial and residential use, though the only connection with that and running the group's ports appears to be a close geographical proximity. Forth's property business isn't a major profit centre at the moment and £25m-£30m of up-front funding will soon be required. To put that into perspective, Forth reported earnings of £30m in 2002.

Mersey beat

The final table reviews the interim results of Mersey Docks:

Six months to June 30             2003           2002

Turnover (£m)                    141.7          133.7
Operating profit (£m)             33.2           32.0
Exceptional items (£m)               -              -
Pre-tax profit                    27.1           27.2

Earnings per share (p)            22.5           22.9
Dividend per share (p)            12.1            6.5

(All figures adjusted for goodwill)

In terms of growth, Mersey's half-year performance was similar to ABP's. UK port sales increased 6% to £72.0m and operating profits improved 4% to £26.9m. Read more.

Like Forth, Mersey also suffers from non-port distractions. Why Mersey is involved in difficult activities like shipping, road haulage, ship repairing and hotel ownership, when its UK ports command margins of 35%, is anybody's guess. What's more, Mersey has business interests in Argentina and Kenya, and has recently started up in... Mozambique.

Summary

The latest results from the three port companies should emphasise their general high margin, safe haven status. Though the historic share price returns of yesteryear are unlikely to be repeated, a spread of the three port shares shouldn't disappoint. All offer the prospect of solid (if unspectacular) earnings growth, coupled with undemanding valuations at present (price to earnings ratios of 13-14, dividend yields around 3.5%).

But if you're fussy like the Qualiport, ABP's far greater focus on its attractive core business makes the company the pick of the ports.

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