New China shipping route to cut A&B's profits
But the company expects to reap benefits from the new service in the longer term
Alexander & Baldwin Inc. expects its earnings next year to lag profits this year because of costs associated the company's foray into China's cargo transportation market.
But A&B's new service linking China, Guam, Hawaii and the U.S. mainland is targeted to reap dividends in the long run. And a strong Hawaii economy is expected to sustain earnings growth from A&B's growing real estate division, which the company projects will play a greater role in its asset portfolio in coming years.
This was the overarching message that A&B's senior executives delivered to the investment community yesterday during a conference call with analysts.
The company's transportation unit, Matson Navigation Co., is five months from beginning its new service to China, said Allen Doane, A&B's president and chief executive. The company projects that it could eventually move 50,000 containers a year from China, producing $100 million in annual revenue, but for now the cargo service, which carries investment costs of $365 million, will "drag on operating profits," Doane said.
Excluding the new China service, A&B has an 8 percent to 10 percent earnings growth objective for Matson in 2006, said Chris Benjamin, A&B's senior vice president and chief financial officer. But the China service is expected to cut earnings by $20 million to $25 million next year, Benjamin said.
A&B previously has warned that the new service could impact earnings, but yesterday's disclosure was more explicit.
The company expects its real estate division, A&B Properties Inc., to produce earnings growth of 13 percent to 15 percent in 2006, but that will not be enough to offset the impact from the China service.
With a slew of new property developments in the pipeline, A&B anticipates that real estate will play an increasingly important role in the company's portfolio in coming years. Although the properties division produced about 39 percent of the company's operating income in 2004, executives expect it to produce 48 percent of operating income by 2009.
A&B Properties intends to develop 200 to 300 new residential units to be located above 150,000 square feet of retail space at the company's Kahului Town Center on Maui, which was partially destroyed by fire earlier this year.
Construction is expected to begin in 2007 and to be completed in 2010. A&B Properties Chief Executive Stanley Kuriyama said the development would be a "mixed-use urban village" that would employ principles of neotraditional urban planning.
Generally, these principles promote the development of walkable neighborhoods centered around small-scale commercial villages rather than traditional suburban subdivisions and big-box retailers, which are designed primarily for people with cars.