Shares: Profits grow in safe havens

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The Independent Online
SOMETHING is happening down at the docks, as two examples highlight.

Forth Ports, which owns a group of ports in Scotland's Forth Estuary, has seen its shares rocket from 110p to 436p since flotation in March 1992. And Medway Ports, acquired by management and employees for pounds 37m also in 1992, raised some eyebrows when it was sold to the Port of Liverpool operator, Mersey Docks and Harbour for pounds 103m barely a year later.

My guess is that the powerful forces driving these spectacularly rising valuations of Britain's larger ports have further to go and that it is not too late to buy into the business. There are four shares to choose from. The market leader is Associated British Ports at 495p, followed by Mersey Docks & Harbour, trading in ex-rights form at 398p, Forth Ports and Powell Duffryn. This last is an old favourite; up from 522p to 610p since I wrote about it in February, it has gone into the ports business by buying a share in Tees and Hartlepool.

Bigger is now better in the world of ports - a trend triggered by the 1989 abolition of the Dock Labour Scheme. Now the giant ports, such as AB Ports' Hull and Southampton, Merseyside's Liverpool, Forth's estuary group and Powell Duffryn's Tees, are able to offer a level of service and facilities that the small ports are unable to match. In a fiercely competitive environment this is leading to massive market share gains by the large operators.

The Port of Liverpool, for example, handled 28 million tonnes of cargo last year against under 10 million in the mid- 1980s and has sailed through recession with strongly rising turnover and profits.

Costs have also been falling sharply. Liverpool is handling similar tonnages to those passing through the port in the glory years of the 1950s and 1960s. The difference is that the work is done by a labour force of 400 instead of 14,000. This will have important implications for profits when the recession affecting world trade starts to lift because of the operational gearing of ports. The facilities have to be in place and the channels kept clear whatever the level of trade. So when business does pick up the increased revenue will flow directly to the bottom line.

Until recently, docks' shares were viewed mainly as property plays. The property assets are valuable. AB Ports, which had a tough period in the early 1990s because of its purchase and rapid expansion of a conventional property business, owns many thousands of acres of land. Much of this has prime development potential, including 200 acres in Cardiff Bay.

Forth Ports has sold a valuable property to the Scottish Office and has other joint ventures on the boil. Mersey has outline permission with P & 0 Properties to develop over 1.25 million square feet of offices and a hotel in the heart of Liverpool. It is also hoping to land the National Lottery as an anchor tenant.

So drastically has port operating changed since the mid- 1980s that companies are now faced with the question of how they are going to use all the money they make. Analyst Ian Wild at BZW reckons that AB Ports will generate pounds 25m to pounds 30m excess cash in future years and that the others with mostly modernised facilities will be spending less than their depreciation charge each year. This will leave cash free for acquisitions, property development or even diversifications.

Last but not least in assessing their potential is the scope to win trade from European ports. Until quite recently Britain's port industry was the sick man in Europe. Now our leading ports are regarded as fully competitive with, if not better than, their continental rivals - some of which have been hit by the sort of labour relations problems that used to plague British docks.

I like the shares in the sector but my preferred choices for the purest port exposure would be Mersey Docks and Harbour and Forth Ports. Mersey has raised profits from pounds 3.8m in 1987 to pounds 16.4m last year. It could make some pounds 30m next year with Medway, and substantially more in subsequent years as benefits flow from the merger. It also has the biggest Free Port in Europe: the 800-acre site in Liverpool has been a spectacular success and still has considerable potential.

Forth, despite its sharp appreciation, also looks good value. The low starting price reflected the uncertainties of floating ahead of a general election that Labour was expected to win at a time when property development potential aroused minimal interest. What has been impressive has been its ability to maintain growth when one of its largest customers, British Pipe Coatings, has been suffering from recession. It also has some big oil-related business coming on stream, such as an increase in exports from BP's Forties Field from nine million to 36 million barrels.

Next year's earnings are forecast at 22p for Mersey and 25p for Forth for prospective PEs of 18 and 17.5 respectively. That seems good value before the expected long-term upswing in trading activity; especially since my hunch is that both forecasts will prove conservative.

(Photograph omitted)

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