15 March 2012

Suggestions that the Auckland Council's return on equity (ROE) target for Ports of Auckland Limited is unrealistic have been dismissed by the council subsidiary which owns the company.

Each year between 1999 and 2003 POAL earned an ROE of between 13.2 per cent and 17.8 per cent, excluding extraordinary items, says Auckland Council Investments Limited Chief Executive Gary Swift. "Even in 2007, POAL earned 11 per cent and this was after excluding the gain on the sale of the Wynyard Quarter.

“On that basis, claims that the ports cannot earn a return on equity of 12 per cent are absolute nonsense,” says Mr Swift. “Auckland Council accepted the target based on advice from both ACIL and POAL. It is challenging but achievable.”

Mr Swift said the target is not based on benchmarking against other ports as each company is quite different and such comparisons are not valid. He also noted that the target is a return on equity and is not a dividend return, return on assets or a return on investment.

The POAL board identified four key strategies to boost the ROE; increasing revenue earned per container, labour flexibility, the review of all operating processes, and freeze on non-essential capital expenditure. After implementing these strategies, the ROE is targeted to reach 12 per cent by 30 June 2016.

First NZ Capital figures show a number of companies expecting to achieve ROE higher than 12 per cent, including Briscoe Group 19.5 per cent, Fisher and Paykel Healthcare 19.3 per cent, Freightways 20.3 per cent, Mainfreight 18.5 per cent, Restaurant Brands 29.4 per cent, Sky City 18.1 per cent and Telecom 18 per cent.

“The target was set to drive performance, and is not a forecast or estimate. The improved performance, set for a five-year period, actually represents an annualised improvement of less than 1.2 per cent,” says Mr Swift.

Mr Swift said it is sound management to set a return target equal to the company’s weighted average cost of capital (WACC), as this is the level of return needed to economically justify any major investment. POAL’s WACC is calculated at approximately 9 per cent which translates to a return on equity of around 12 per cent.

“It is also incorrect to say that the 12 per cent target has caused the current labour dispute. The target was set last year in the months before the recent labour dispute at the port.

“Whatever the case, it is right for a public entity to be asking for a good return. Auckland Council supports retaining public assets in public ownership and that means public assets need to be performing as good as they can be. If they don’t, it means ratepayers meet the cost of that underperformance in the form of higher rates.”

Notes:
There are a number of ways of measuring a company’s profitability; return on shareholders funds (or equity), return on total assets or return on the market value of the investment. Returns can also be defined as net profit after tax or dividends, or net operating profit after tax. ACIL has chosen to measure POAL’s profitability as net profit after tax as a percentage of shareholder funds.

Background information on ACIL
Auckland Council Investments Limited (ACIL) is a Council Controlled Organisation (CCO) of Auckland Council. Its role is to manage Auckland Council’s major equity investments.

The value of investments that ACIL owns and/or manages is approximately $1.7 billion. In addition to the investment in POAL, it owns 22.4 per cent of the shares in Auckland International Airport Limited and 100 per cent of the shares in Auckland Film Studios Limited. It also manages a diversified financial assets portfolio for the Council.

The return on these investments, in the form of dividends received by ACIL on behalf of Auckland Council, are invested by the council into activities that help to make Auckland the world’s most liveable city.

ENDS

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