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QUALIPORT
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As buy and forget companies go, Associated British Ports (LSE: ABP) is difficult to beat. The company manages 21 ports around the UK and handles a quarter of the country's seaborne trade. Industry shareholders enjoy significant barriers to entry, which have been emphasised by ABP's proposal to build a new terminal at Dibden, near Southampton. Dibden ABP's plan for Dibden involves building a deep-sea container terminal that's capable of handling six large container vessels simultaneously. Only three UK ports (Southampton, Felixstowe and Thamesport) can handle such vessels at the moment, which on their own, according to ABP, 'will not be able to meet the long-term demands' of future container traffic. ABP notified interest parties of its intention to develop the Dibden site (originally acquired during 1967) in 1994. The group opened discussions with the relevant local authorities in 1997 and then submitted a formal development application to the government in 2000. Following a lengthy public inquiry, a final planning decision is due this year from the Secretary of State. Last week's full-year results from ABP re-affirmed 'up to £600m' would be spent developing Dibden should it get the green light. The progress of Dibden suggests this is not a sector where radical newcomers are likely to change the status quo overnight. Assuming a suitable coastal site can be found (not easy in itself), years of planning investigations and millions of pounds of capital are required just to get a port up and running. With competition thus limited to the existing players, operating a port can become a very lucrative activity. Read more. Even with the restrictions on the development of new ports, ABP does not have to resort to sizeable acquisitions to grow. In the latest annual results, the group noted: "Our commitment to organic growth and the potential in our core UK ports business mean that we do not expect to make any major acquisitions in the near future. We believe that developing new projects within our business that can deliver the required rate of return represents a much more efficient use of capital than paying a premium and increasing our risk profile by buying another business." Assuming necessary approvals, ABP expects to invest more than £1b over the next ten years. As well as the money for Didben, £140m has been earmarked for four new terminals on the Humber, while the rest will fund 'regular growth projects' at existing group sites. Five-year record ABP's financial progress has been steady. The table summarises the company's five-year record:
Year to December 31st
1999
2000
2001
2002
2003
Turnover (£m)
351.1
390.6
405.4
429.8
401.3
Operating profit (£m)
157.4
168.4
170.1
175.8
176.6
Pre-tax profit (£m)
36.6
139.7
131.0
140.5
146.4
Earnings per share* (p)
24.6
27.5
28.1
30.4
31.0
Dividend per share (p)
11.5
12.8
13.8
14.8
15.3
(*excluding exceptional items)
Adjusting for disposals made in 2002, underlying turnover fell by £1m to £402m while operating profits gained £1m to £177m. However, the core UK ports division witnessed sales improve 7% to £349m and operating profits increase 8% to £152m, and now represents 85% of the whole group (the balance is generated by property development and a small US imports business). During 2003, growth in roll-on/roll-off trade, deep-sea container traffic, vehicle imports and cruise ship calls offset declines in iron ore imports and the handling of low margin oil. Underlying the business attractions, operating margins at the UK ports came to a whopping 44%.Cash flow
ABP's cash flow is superb:
| Year to December 31st | 1999 | 2000 | 2001 | 2002 | 2003 |
|---|---|---|---|---|---|
| Operating profit (£m) | 157.4 | 168.4 | 170.1 | 175.8 | 176.6 |
| Change in working capital (£m) | 7.1 | 2.6 | (11.2) | 3.3 | (6.9) |
| Depreciation (£m) | 21.5 | 23.6 | 23.7 | 24.5 | 27.9 |
| Net capital expenditure (£m) | (0.1) | (13.9) | (60.3) | (73.3) | (62.4) |
Working capital is amazing: there's no stock while debtors and creditors are minimal. Though cash expensed on tangible fixed assets looks high when set against depreciation, ABP's 2003 results did confirm: "Maintenance expenditure during 2003 was just below the level of depreciation and the group expects to maintain this performance in 2004... Revenue-earning capital expenditure amounted to £41.7m." Net borrowings stood at £437m at the end of December. However, interest payments were covered a gross five times in 2003.
Although ABP has negligible working capital, low maintenance expenditure requirements and a relatively large amount of debt, these characteristics aren't reflected in the incremental return on equity figures. As well as a disastrous foray into the US (under previous management), disposals of and revaluations to ABP's property interests interfere with the calculation. For the record, recent returns on equity come to about 13%. Not astounding, but on balance, the accounting attractions imply ABP can inherently generate superior returns on reinvested profits in future.
Turning to FRS 17 pension matters, ABP is one of the few listed companies that can crow about a surplus. The fund had £34m in excess of requirements at the year-end and the company will maintain its contribution holiday in 2004.
Summary and valuation
An obvious moat, a focus on its core business, an organic growth strategy, no pension problems, great cash flow: ABP is one of the most attractive companies on the Qualiport's watch list. What is lacking, sadly, is a great opportunity to purchase the shares.
Based on the latest results, ABP's 461p shares trade on a price to earnings ratio of 14.8 and offer a 3.3% dividend yield. With earnings reflected fully in cash, the present free cash flow yield comes to 6.7%. Demanding 7.5% therefore requires a 413p buy price.
More: Long-Term Safe Havens | Plain Sailing In A Choppy Market | Port Quay Features | Dibden Terminal