(*excluding exceptional items. All figures exclude goodwill. Pre-2003 figures not adjusted for FRS17 -- see below)

On a statutory basis, ABP's 2004 performance witnessed turnover increase 10% to £440m and total operating profits gain £4m to £166m.

At the core UK ports division, underlying sales improved 5% to £365m and underlying operating profits edged 3% to £142m. This operation now represents around 85% of the whole business, with the balance generated by property development and a small US imports subsidiary.

During 2004, growth in roll-on/roll-off trade, deep-sea container traffic and timber, steel and coal imports offset lower grain exports. Underlying the business attractions, operating margins at ABP's UK ports came to a stunning 39% on aggregate.

All those figures, however, were prior to £52m of exceptional charges, most of which were costs associated with the failed development of a new terminal at Dibden, near Southampton. The write-off was initially levied within ABP's interim results and further comment can be found here.

Another highlight within ABP's 2004 profit and loss account was £29m worth of non-port property sales, which were accounted for as revenues and helped bolster the statutory top line.

Something worth noting is ABP's full adoption of FRS17 for 2004, which now confuses the company's longer term past performance. The figures in the above table up to and including 2002 have not been adjusted for the new pension accounting standard, which has had a material affect on profits of late.

Indeed, applying FRS17 prompted ABP's 2003 pre-tax profits to be restated from £146m to £135m and 2003 earnings per share to be restated from 31.0p to 28.6p. These represent declines of 8% or so and come despite ABP reporting a £26m net pension scheme surplus at the end of December 2003! For the record, ABP remains one listed company that does not have a major pension scheme worry. At the end of last year, it still had a net pension asset of £24m.

Cash flow

ABP's cash flow is majestic:

Working capital is amazing: ABP carries no stock and debtors and creditors are minimal. Though cash expensed on tangible fixed assets looks high when set against depreciation, ABP's 2004 results did confirm: "Maintenance expenditure during 2004 was once again below the level of depreciation and the group aims to maintain this performance in 2005... Revenue-earning capital expenditure amounted to £37.4m."

Total capital expenditure will remain high in the foreseeable future, with more than £400m planned to be invested over the next ten years. Among ABP's current projects is the £28m development of Immingham Outer Harbour and £45m earmarked for a major extension to Humber International Terminal, both of which are set to become operational during 2006. Other major projects around the Humber Estuary are being drawn up, too.

Reassuringly, ABP re-affirmed in its latest results: "We only build new facilities for customers once they have signed medium- to long-term contracts that will give us a return of 15 per cent or more on our investment… As we see plenty of investment opportunities to grow our existing ports network, we do not expect to make any acquisitions in the near future. Getting a return of 15 per cent or more from organic growth is a more efficient use of capital than buying -- and integrating -- a competitor. Investing in our core business represents a better use of shareholders' money."

Another good sign of cash generation at ABP is its share buyback programme. Last year, £90m was spent repurchasing shares and the latest results announced the programme would be extended by a further £75m to £205m.

Furthermore, net borrowings stood at £462m at the end of December. Though interest payments were covered between four and five times in 2004 -- generally  speaking, rather low -- the stable operational nature of ports, backed up by numerous long-term contracts, make the debt level acceptable.

Valuation and summary

ABP remains a firm Qualiport favourite. It's simple to understand and enjoys an obvious moat and significant barriers to entry. It also has a growing focus on its main business, an organic growth strategy, no pension problems and wonderful cash flow.

Sadly, the shares are not obviously undervalued. As explained here, ABP is best valued on a sum-of-the-parts basis, with the core ports business separated from the lumpy and dwindling property investment/development operations.

Assuming standstill profits, the ports business could generate around £83m of free cash in 2005, equating to about 27.1p per share. Demanding a 7.5% free cash flow yield would therefore value this part of the group at 362p. The stated asset value of ABP's non-core property interests were £92m, or 30p per share. The Qualiport would thus be a buyer at up to 392p a share. Last night, the shares closed at 482.25p.

More: Lessons From The Quality Port | Britain's Quality Port | Quay Features Of Ports

Maynard owns shares of Associated British Ports.

Portfolio value