Lisa-Maree O’Neill

ACCT11059

Assessment 2 – Step 7-10

STEP 7

Conducting more research into my company made me realise just how many services Port

of Tauranga offer that I was completely unaware of like vehicle washes and crew

transportation fees. I actually found it quite interesting to look further into their operations.

Their website was extremely helpful with providing details on their services and costings.

The three services I have chosen are as followed:

1. Berth Hire.

2. Crane Hire.

3. Garbage disposal of ship.

Berth Hire I chose because its an obvious service that a port would provide. Berth Hire is

charged on a daily rate (24 hours) from the time that the vessel is berthed. Berthing prices

as provided on the Port of Tauranga website are:

General Berth $11.13 / metre LOA / day

Cement / Tanker Berth $9.82 / metre LOA / day

Upon further investigation LOA mean length overall. This is the maximum length of a vessels

hull measured parallel to the waterline.

Crane hire I chose because in the transportation side of things I believe that the use of the

crane would happen quite frequently. Crane hire is:

$1,632.00 / hour or part thereof. A minimum charge does apply.

My third service is the disposal of garbage from the ship. I just wouldn’t have thought about

garbage on a ship and its disposal so when I saw it, I decided it would be something

interesting to include as there is a huge price difference between general rubbish and

rubbish that needs to be quarantined.

Charges for rubbish disposal are as followed:

Ship’s Garbage- Quarantine -$94.86 / 240 litre bin

Ship’s Garbage- Non-Quarantine $15.81 / 240 litre bin

For the purpose of this exercise I am going to use a vessel with a LOA of 151m as a general

berth for 24 hours. The crane is hired for 4 hours and 1 x 240 litre no quarantined rubbish is

removed.

Berth: $11.13 x 151 = $1680.63

Crane Hire: $1632 x 4 = $6528

Garbage: $15.81 x 1 = $15.81

To assign a variable cost to the above services, I had to do a little thinking (not something

I’m always good at 😊). A variable cost varies with level of production. Seeing as though I

have a service company there are a lot of variables attached to my chosen services. Ships

would be berthing for different lengths of time and would be of different sizes, cranes would

be used for different periods of time dependant on cargo and disposal of garbage would vary

greatly from vessel to vessel. To attach a variable cost percentage to my chosen services I

really just took a stab in the dark and guessed based on the information I read about Port of

Tauranga operations. I thought about what the percentage of fixed cost would be in relation

to the service and that made it a little easier to think of what the varying cost percentage

could be. I have assigned the following variable cost percentages to my services.

Berth Hire: 40%

Crane Hire: 30%

Garbage Disposal: 70%

This leads to the following variable costs of each service.

Berth: $1680.63 x 40% = $672.25Crane Hire: $6528 x 30% = $1958.40Garbage Disposal: $15.81 x 85% = $13.44

A contribution margin is the amount in which each dollar of sales contributes to covering the

fixed cost of a product or service and its contributing to profits.

The calculation done in order to obtain the contribution margin is the sales price minus the

variable costs. The contribution margins for my chosen services are as followed:

Berth: 1680.63- 672.25 = $1008.38

Crane Hire: 6528 – 1958.40 = $4569.60

Garbage Disposal: 15.81- 13.44 = $2.37

The Contribution margin ratio is:

60% for Berth Hire

70% for Crane Hire

15% for garbage disposal.

The highlighted dollar values above are the amounts that goes towards the fixed costs and profit of that service.

This would give Port of Tauranga positive contribution margins when it comes to these

specific services. Port of Tauranga would have many different contribution margins for their

many services, some of which may have negative contribution margins, but as my firm is a

service company, I believe it would be essential for them to carry out all the services they do

in order to operate. I was a little apprehensive about assigning a value to crane hire but in

my opinion, it has fewer variable costs associated with it compared to Berth Hire. It is

interesting to note that there is a minimum charge for crane hire. I would assume that this

would be pretty close to their fixed costs for the service. Berth higher to me would contribute

a higher variable cost percentage because I believe there are more variable costs attached

to it than the crane hire such as vessel size and length of stay. Garbage disposal in my

opinion would be a relatively straight forward service, nowhere near as extensive as the

other two services with greater variable costs. All in all, firms need to produce products and

services with varying contribution margin as there is usually always going to be more than

one variable that goes into firms’ operations.

Port of Tauranga would face many constraints in regards to their capacity to produce

services. Since they are a service company in the freight sector, their livelihood demands on

what the market is doing at any time. If trade for a certain item Port of Tauranga are

involving in shipping declined then that would have a direct impact on their revenue. Moving

shipping containers involves the use of cranes and trained employees to operate said

cranes. Since there is only a specific number of cranes that the port has at their disposal,

shipping containers can only be moved according to how many of those cranes are in use. If

there aren’t enough employees available at a specific time to operate the cranes or if a crane

needs unscheduled repairs this could affect the firms whole schedule and result in delays in

shipping which could once again affect their capacity to serve their clients. There are many

other things such as skilled workers, fuel costs, weather and changes to the specifics in

markets that the port rely on to generate revenue could also affect their capacity to provide

their service. I believe with the three services I have chosen the port would have a very good

indication of exactly what they can provide to their clients. They recently acquired a ninth

crane which indicated there will be a ramp up in production. I believe the port would factor in

maintance of their machinery in times when the weather dictates less activity in the port to

ensure they don’t leave themselves unable to stick to their schedule. In term of the garbage

disposal system. Changes in the cost of landfill and dumping fees could result in a change of

how much garbage they can have on site. This can also be said when they acquire garbage

that needs to be quarantined. Changes to legislation on what is required to be quarantined

the costs to dispose of these times could limit the port in their ability to supply this service. I

do think that the port offers a lot of extra services in order to be able to offer a whole

package for vessels and their occupiers to ensure they can continue to generate substantial

revenue. If they were only to supply one service, I highly doubt the port would be able to

operate efficiently.

STEP 8

Ratio analysis

I found this process pretty straight forward with the help of Maria’s videos. I am a little

nervous about explaining what the ratios mean for my company in my own words but while I

was completing the ratios little things about the calculations would pop into my mind which

made me think I might be able to ‘get it’ after all.

Net Profit Margin: As the net profit margin is the amount of profit a business can extract from

its sales, I expected healthy percentages here from what I had read in the reports and whilst

I restating the company’s financials. The margin has been trading upward apart from in

2016. When I did this first calculation, I was interest to see how 2016 would fair across the

rest of the ratios.

Return on Assets: Seeing as thought the net profit margin had an upward trend, I was

expecting the same kind of results for this ratio. With this calculation I can see that in for

every dollar of assets the port generated 18.4 cents in earnings. I wasn’t sure what

percentage of ROA is classifies as good, but I know that the higher the percentage is the

better the firm is profiting off their assets, so I believe the port is doing relatively well. 2016 is

once again significantly lower once again. I am assuming at this point that this trend will

continue with all my other ratios so once I have completed them, I will find out why.

2018 2017 2016 2015Profitability RatiosNet Profit Margin Net profit after tax/ sales 107.29% 60.07% 28.05% 53.50%Return on Assets Net profit after tax/ total assets 18.4% 10.8% 5.2% 11.1%

Days of Inventory: I became a little unstuck here as I found inventories but no distinct costs

of good sold. I went over my reports and could only find one footnote about inventories from

2015 and it stated that inventory that year was made up of machine parts for maintenance to

be carried out the next financial year. It also said diesel fuel made up a high percentage of

the inventories. As far as costs of goods sold, I concluded that the port doesn’t on sell these

specific items and they are tied to their operational costs so I am unable to calculate this

ratio as they don’t produce a product to sell as a service company. They sell their services

so I got a little confused as what would constitute as costs of goods sold, but after posting on

Facebook Martin said that firms don’t have to disclose all of their expenses. I thought that

other expenses may have been the right figure but that is to do with auditing costs etc. I then

did the calculation with direct fuel and power expenses and maintenance of plant property

and equipment but I wasn’t happy with the percentage I was getting back so I chose not to

do the ratio as I don’t have a definitive figure.

Total Asset Turnover Ratio: I expected this figure to be quite low as the Port is largely asset

based so the turnover would be slower. The trend has headed in a slightly downward

direction over the last three years but this can be due to a larger asset purchase or selling of

assets.

Efficiency (or Asset Management) RatiosDays of Inventory Inventory/ av.daily cost of goods soldTotal Asset Turnover Ratio Sales/ total assets 0.17 0.18 0.19 0.21

Liquidity Ratio: I was hoping that my company has enough current assets to meet their

obligations which did not happen in this ratio. There are only 18 cents of current assets

available for every dollar of liabilities. In order to gain a better understanding of their liquidity

position I looked at their financial structure. The liquidity rate has decreased since 2015,

going back up 1 cent in 2018 so looking at my financial statements showed that loans and

borrowing has increased every year with no a real change to the assets figures overall

except for the variance in higher inventories in 2015 and 2018.

Liquidity Ratios Current Ratio Current assets/ current liabilities 0.18 0.17 0.23 0.28

Debt/Equity and Equity Ratios: This showed me that Port of Tauranga is a relatively

comfortable financial position. Debt is less than 50% of equity in 2018, the figure has

fluctuated slightly but is pretty similar to 2015. Percentages in the high 60’s for equity to total

assets mean that only around 30 percent of their assets are financed by debt so this is good

when analysing the liquidity ratio as a firm could have a good liquidity ratio and be in a poor

financial position. Figures are relatively stable across the years.

Financial Structure RatiosDebt/ Equity Ratio Debt/ equity 47.7% 52.6% 49.3% 46.1%Equity Ratio Equity/ total assets 67.7% 65.5% 67.0% 68.4%debt ratio Debt/ total assets 32.3% 34.5% 33.0% 31.6%

Market Ratios: I was super interested to see how these ratios came as these ratios indicate

investor confidence to me. Initial I was concerned at the EPS and DPS went down, but in

2016, the port announced a capital restructure, aiming to return up to $140 million to

shareholders over four years. This is the third year of special dividend payments of $34

million. So, the port has dramatically increased the number of shares issued in 2017 and

2018 which can be seen below as well. 2018 2017 2016 2015

Number of issued ordinary shares 680119.179 680390.580 136077.196 136068.776

It was actually good that I researched this because I had the wrong calculation as I used the

incorrect cell for net profit after tax. The port said earnings per share in 2018 were 14 cents,

which when I did the correct calculation is what I got. In turn this changed my Price Earning

Ratio. It has increased since 2015. Since the Price Earnings Ratio tells me what an investor

is will pay per dollar of earnings, a higher price earnings ratio indicates expected growth in

the future.

Market RatiosEarnings per Share (EPS) Net profit after tax/ nos of issued ordinary shares 0.14 0.12 0.57 0.58Dividends per Share (DPS) Dividends/ number of issued ordinary shares 0.17 0.16 0.53 0.51Price Earnings Ratio Market price per share/ earnings per share 36.79 36.29 34.32 29.74

Now the fun part. At this stage I was super keen to see what My firms Economic Profit, but

the ratios I had to do before that were interesting too.

I almost feel like I am part of my company so these figures had me pretty happy. The return

ROE has increased by over 10% when comparing 2017 to 2018. The RNOA has tracked the

same way and is comparative with the figures in the ROA. Net borrowing cost has slightly

decreased over the last 4 years and is low. Profit margin has increased significantly over the

past 4 years, this is shown in the Net Profit Margin calculations as well, which when going

over my restated financials is because of asset revaluation. ATO tracks similarly to the total

asset turnover ratio. I used the 10% WACC as I couldn’t find a WACC percentage in my

firms reports.

Ratios Based on Reformulated Financial StatementsReturn on Equity (ROE) Comprehensive Income/ shareholders' equity 27.13% 16.49% 7.78% 16.18%Return on Net Operating Assets (RNOA) Operating income after tax (OI)/ net operating assets (NOA) 20.66% 12.56% 6.64% 13.02%Net Borrowing Cost (NBC) Net fin. expenses after tax/ net financial obligations 3.13% 3.12% 3.57% 3.58%Profit Margin (PM) Operating income after tax (OI)/ sales 111.86% 64.79% 32.85% 57.48%Asset Turnover (ATO) Sales/ net operating assets (NOA) 18.47% 19.39% 20.20% 22.64%Economic profit (RNOA - cost of capital) x net operating assets (NOA) 163,764.0 33,830.0 (40,882.2) 35,749.4

Economic Profit is significantly larger in 2018 when compared to the other years. As well as

that 2016 sticks out as a less than desirable year for the company as indicted in these ratios

and the initial profitability ratios. In order to analyse why I went back over my reports. I found

this in the 2016 annual report which accounts for the figures above.

‘Decline in bulk cargoes reflecting continuing challenges in New Zealand’s forestry and

agricultural sectors. Notably, log exports fell as did imports of fertiliser, bulk liquids and stock

feed. Revenues fell to $245.5 million from $268.5 million. The decrease in revenue is due to

the merger of our former subsidiary Tapper Transport into our Coda logistics partnership

with Kotahi. Net profit after tax fell 2.4% to $77.3 million as the Company’s now largely

completed $350 million infrastructure investment programme resulted in higher depreciation

charges, which are up $2.7 million in the 2016 year’ (Port of Tauranga, 2016 Annual Report)

The huge swing in the Economic Profit in 2018 is because of the increase in operating

income and asset revaluation which drove up the profit margin. It will be interesting to see

how their economic profit pans out for this year.

STEP 9

Capital Investment Decision.

For this step I chose to analyse the expansion of the container facility at the Port of

Tauranga Terminal and the upgrading of containers to allow for refrigeration connection

points. 40 hectares is available for expansion which could triple the container capacity at

Port of Tauranga. The cost for this would be 100 million dollars (NZ) with an estimated life of

10 years. The port would not plan on the expansion not being viable after 10 years however

for the purpose of this assessment if it wasn’t viable after this time the Bay of Plenty

Regional Council who is a major stakeholder could buy the land and improvements so the

residual value of the expansion would be 10 million dollars. The upgrade of the container

facilities to allow for more refrigerated containers would significantly increase the amount of

cold storage available. Kiwi fruit is a major export and an increasing amount is being shipped

by refrigerated containers. The cost for this upgrade would be 30 million dollars with an

estimated life of 6 years due to the cost of repairs associate with generators and refrigeration

units. If the upgrade was not viable after the 6 year period the refrigerated containers could

be converted back to dry storage so the residual value of this opportunity would be 5 million

dollars.

The estimated life, residual value, original cost and expected future cash flows are included

in the table below. The cash flow values were made from the cash flow values in Port of

Tauranga’s financial reports. The investment would be made on the 31st of December 2019.

future cash flows are expected to be received on the 31st of December each year.

Expansion of container facility

Cold storage upgrade of containers

Original Cost 100.0m 30.0m

Estimated Life 10 years 6 years

Residual Value 10.0m 5.0m

Estimated Future Cash Flows

2020 30.0m 5.0m

2021 30.0m 5.0m

2022 50.0m 10.0m

2023 75.0m 15.0m

2024 100.0m 17.0m

2025 115.0m 23.0m

2026 130.0m

2027 130.0m

2028 130.0m

2029 130.0m

After analysing the IRR and NPV percentages, I would suggest that the port go ahead with

option 1 and expand the container facility. The initial investment is high but payback period is

shorter than option 2. In addition to this the NVP value indicates that it would add value to

the firm and the IRR is high at over 50% which indicates that it will return that percentage on

the initial investment. Option 2 has a negative NPV value which means it would add negative

value to the firm. The IRR is relatively high considering the NPV which indicates it would still

return over 20% on the initial investment, but this in my opinion does not dispute the fact that

the NPV in this case is negative.

Peer Interaction

I have been relatively quiet throughout this assessment but I still had a few interactions with my peers via our Facebook page, which I will say is such a valuable resource to have. It’s like our little community and I don’t have that feel with my other three subjects.

I first posted on Facebook when I came unstuck with my ratio’s.

I’m still thinking Paul has clones because he is always there for support. The guy deserves a medal in my opinion. Martin also gave me some information that really helped my decision with my inventory ratio.

This then helped me to comment on Kyl’s post about his inventory ratio. I often feel apprehensive about commenting incase what I say is wrong, but this unit has helped me realised that it’s about learning not being right.

I also posted on my blog about my ratio’s as well as my draft work. The links are below:

https://wordpress.com/block-editor/post/imaccountingonyou.home.blog/115

https://imaccountingonyou.home.blog/2019/06/02/its-the-end-of-the-world-as-we-know-it/

STEP 10 Feedback