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QUALIPORT
Big Fat Profits From Quality Port

By Maynard Paton (TMFMayn)
September 26, 2002

Although handling cargo may not be glamorous, the UK port industry is well worth investigating for a long-term investment. It's steady and predictable, in which newcomers are scarce and competitive restrictions plentiful. As this review of Clydeport (LSE: CLY) showed, the accounts of a port operator can be very attractive. Aided by the Department of Transport, this feature spotlights the industry's appeal.

Quay features

The UK's 650-plus ports play a vital role in the country's economy. Studies estimate that 95% of the UK's international trade by volume -- worth approximately 250b per annum -- is transported by sea. Involving around 600m tonnes of cargo, the UK handles 20% of European Union shipments and about 10% of all world seaborne trade. Since 1981, annual tonnage handled by UK ports has grown at just under 2% a year, although certain cargo types have declined over that time.

While there are plenty of harbours in operation, just thirteen ports accounted for 75% of the UK's traffic tonnage during 1999:

Port                    1999 Tonnage (m)


London                      52.2
Grimsby & Immingham         49.8
Tees & Hartlepool           49.3
Forth                       45.4
Sullom Voe                  37.7
Southampton                 33.3
Milford Haven               32.2
Felixstowe                  31.5
Liverpool                   28.9
Dover                       19.4  
Orkneys                     17.0
Medway                      14.0
Belfast                     12.9
Others                     142.0
Total                      565.6

Indeed, such a concentration in a handful of locations has long been a feature of the UK port industry:

Number of ports responsible for a given level of UK port traffic:
1978 1983 1988 1993 1998 1999 90% 27 33 35 31 29 29 75% 13 16 16 15 14 13 50% 6 6 7 7 7 7 25% 3 3 3 3 3 3

However, exactly where the tonnage is handled has changed over the decades:

Port                   1965         1965      1999        1999
                     Tonnage (m)    Rank    Tonnage (m)   Rank

London                 64.6           1       52.2          1
Grimsby & Immingham     8.3          12       49.8          2
Tees & Hartlepool      12.1           8       49.3          3
Forth                   6.1          14       45.4          4
Sullom Voe                -           -       37.7          5
Southampton            24.4           4       33.3          6
Milford Haven          24.8           3       32.2          7
Felixstowe                -           -       31.5          8
Liverpool              31.7           2       28.9          9
Dover                   1.4          27       19.4         10

Medway                 22.3           5       14.0         12
Hull                   12.1           9       10.1         15
Clyde                  15.3           7        8.5         17
Manchester             15.8           6        7.8         18
Bristol                 9.3          10        7.6         19

The above table provides some comfort for long-term port shareholders:

* Ports don't disappear: Although tonnage has declined in five cases, how many other industries can say all the top ten operators of 1965 remain in the top twenty?

* Newcomers are rare: Just two ports have sprung up from nowhere in the past forty years. Sullom Voe in Shetland was purpose built for handling North Sea oil, while traffic in and out of Felixstowe has surged due to the port's specialisation in container shipments. If you were to go back to 'only' 1980, you'd find every top ten port of 1999 handling notable shipment tonnage.

Specialise

Not only do a handful of ports dominate the handling of UK imports and exports, they all tend to specialise in certain cargoes. The following table lists the main types of cargo categories, and highlights how each product is usually handled by a small number of ports:

Cargo                  Tonnage       Market       Leader's  Top 5's
                          (m)        Leader        share     share
                                                    (%)       (%)

Crude Petroleum          186.0       Sullom Voe      20        69
Petroleum Products/Gas    83.5       Milford Haven   20        72
Ores & Scrap              25.4       Port Talbot     32        90
Coal & Coke               22.4       Clyde           21        75
Sea-dredged aggregates    12.2       London          50        79
Crude Minerals            12.0       Glensanda       43        82
Unmilled Cereals           7.3       London          18        59
Container                 58.4       Felixstowe      41        78
Ro-Ro Freight              1.6*      Dover           29        55
Ro-Ro Passenger Traffic   31.4**     Dover           58        85
 
(*Vehicle numbers in millions)
(**Passenger numbers in millions)

Competitive advantage

On the face of it, a port would seem a great business for the long-term 'franchise' investor. It won't generate major profit growth, but the consolidated nature of the industry should offer plenty of operational predictability. The same old locations seem to dominate over time, with the big players all having decent market shares of the various cargo types.

Generally speaking, external factors perhaps have the greatest affect in determining the long-term success of a port. For instance, Dover has grown over the years through the general rise in cross-channel roll-on, roll-off traffic. Scottish ports Sullom Voe and Forth have benefited from North Sea oil, while the gradual decline in coal exports has hampered North East ports such as Sunderland and Tyne.

With a handful of big players and chunky market shares, it's fair to assume port owners must enjoy plenty of competitive restrictions. Obvious examples would be:

* Planning/financial: Rival ports just can't be built next door or overnight;
* Physical: Only certain parts of the coast are suitable for a port. Furthermore, as ships increase in size, the larger, more established terminals should prosper over time, and;
* Location: Proximity to the cargo's origin or destination can save the customer additional transport expense.

However, are the attractive industry characteristics generally reflected in a port's finances? Certainly the stratospheric operating margins of the four major port players -- Associated British Ports (LSE: ABP), Mersey Docks (LSE: MDK), Forth Ports (LSE: FPT) and Clydeport -- support the 'franchise' nature of the industry:

Company          Share     Market  UK Port   UK Port    UK Port
                 Price     Value    Sales   Op profit  Op margin
                  (p)       (m)     (m)     (m)        (%)

ABP               423      1,380     304.2    137.2        45
Mersey Docks      529        451     131.1     52.3        40
Forth Ports       835        374     117.2     30.8        26
Clydeport         391        164      33.7     13.6        40

(All figures for year ending December 2001)

Unfortunately, all four UK operators generate non-port profits too:

Company         UK Port       Total         UK Port
               Op profit    Op profit         (%)
                 (m)         (m)                

ABP              137.2        170.1           81
Mersey Docks      52.3         63.8           82
Forth Ports       30.8         45.6           68
Clydeport         13.6         18.5           74

(All figures for year ending December 2001)

Of the four, only ABP appears to be really concentrating on its main business. Forth Ports and Clydeport are both busy with sizeable property developments while Mersey is involved in shipping and has also acquired a low margin logistics and transport business.

In fact, ABP's new management have commendably re-focused the group. Since the start of 2000, ABP has raised 220m from various property and business disposals, with another 50m expected by the end of 2003. The proceeds have been used to fund share buybacks and reinvestment in the core ports business. In addition, the following statements from the 2001 ABP annual report are worthy of note:

"We will continue to concentrate capital investment on commercially-attractive projects generating internal rates of return of at least 15 per cent, supported by long-term contracts with quality customers. In addition, non-revenue earnings or 'maintenance' capital expenditure will continue to be monitored closely and contained below the group's annual depreciation charge"

"We continue to take a cautious view in respect of acquisitions"

"Three major strengths of our UK ports business support our growth strategy. First, the geographic spread of our 21 ports throughout the UK reduces the reliance on any one trade route. Second... our ports business... is not dependent upon any one type of cargo. Third, over 50% of our UK ports business for the next twelve months is already under contract"

The country's largest port owner, a greater operational focus and the highest industry margins -- ABP will be evaluated for the watch list in the near future.

More: Department Of Transport: Focus On Ports