Port of Newcastle PONEIV 5.9 11/24/31s

October 2024

By Matthew Macreadie

We see very good value in Port of Newcastle (PONEIV).

The company is now rated BBB-/positive (S&P) after the company successfully implemented its new tariff structure. It even maintained its positive outlook, signalling potential for further upgrades over the next two years.

The upgrade should help PONEIV 2031s narrow the gap to Newcastle Coal (NCIAU) 2031s. In our view, there is no reason why PONEIV should be trading 100bps or 1% wider than NCIAU and we expect this differential to converge.

The new tariff structure is much closer to how regulated utilities derive their revenues, with a maximum allowable revenue being calculated based on a set return on assets plus an allowance for reasonable costs. Periodic resets of its return assumptions should allow tariffs to adjust for interest rate changes. There is also a true-up mechanism where under or over recoveries of tariffs in one year can be set off or recovered in the next year. This will largely insulate PONEIV from volume risk.

Under the new structure, the company will progressively increase wharfage charges over the next few years until it reaches the maximum allowable revenue cap. There was some uncertainty on the implementation of this new tariff structure as it needed shippers’ agreement, but now that the first phase of increases is done, S&P felt comfortable upgrading the name. S&P expects FFO/debt to improve sharply from 5.9% in 2023 to 16-17% in FY25/FY26. While this would be sufficient for another upgrade, it would depend on how shareholders use the increased cash flows. Any further upgrades would also depend on management commitment to maintain those improved metrics and not simply increase distributions. Note that management has committed to maintaining an investment grade credit profile, but not necessarily a BBB rating.

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