Hutchison Port Holdings Trust - DBS Research 2017-07-21: Lacklustre Earnings Lead DPU Cut

Hutchison Port Holdings Trust - DBS Vickers 2017-07-21: Lacklustre Earnings Lead DPU Cut HUTCHISON PORT HOLDINGS TRUST NS8U.SI

Hutchison Port Holdings Trust - Lacklustre Earnings Lead DPU Cut

  • 1H17 core earnings declined 19% y-o-y to HKS$436m, which were below expectations.
  • 1H17 DPU cut to HK 9.5cts (-32% y-o-y) as expected.
  • Throughput volumes could be stronger for the upcoming peak season but rates remain under pressure. 
  • Maintain HOLD, TP US$0.42.



Maintain HOLD with TP of US$0.42 as DPU guidance of 20-23 HKcts for 2017 is maintained. 

  • We see Hutchison Port Holdings Trust (HPHT) as fairly valued given its current prospective yield of 5.9% as the group is maintaining its DPU guidance of HK 20-23cts for FY17F following lacklustre interim results. 
  • We expect DPU for FY18F to stay flat from FY17F as any improvement in operating earnings would likely be eroded by higher interest costs.


What's New: 

1H17 earnings below expectations; DPU cut to HK 9.5cts as expected

  • Excluding a rent and rebates refund in 1H16 of HK$357m, HPHT’s net profit declined 19% y-o-y to HK$436m. 
  • Adjusting for the new co-management arrangement for COSCO-HIT and ACT terminals in HK effective 1 Jan 2017, revenue for HPHT was flat in the first six months of 2017 as throughput growth of 5% was largely offset by lower tariffs in both Yantian and Hong Kong, as well as RMB depreciation during the period. As a result, operating earnings were flat at HK$1,664m. 
  • Below the EBIT line, higher interest costs (+17% y-o-y) and losses at newly acquired Huizhou Port meant that pretax earnings fell 8% y-o-y to HK$1,245m. Taxes were higher by 6% y-o-y despite lower pretax profits due to the increase in tax rates at YICT Phase III Expansion and West Port Phase I following the expiry of their tax exemption period.
  • HPHT declared an interim DPU of HK 9.5cts versus HK 14cts a year ago, a y-o-y decline of 32%. HPHT maintained its DPU guidance of 20-23cts for the full year. Our DPU forecast is HK 22cts for 2017.
  • Given that interim earnings were below our expectations, but with the upcoming peak season potentially faring better than expected in terms of throughput volumes, we maintain our forecasts and TP for now.


Where we differ: 

  • While our EPS forecasts for HPHT are about 10% above consensus on more bullish revenue forecasts, our DPU forecasts are equally cautious as we expect the group’s debt repayment programme to lead to a 28% drop in DPU for FY17F and FY18F.


Potential Catalysts. 

  • HPHT’s share price could rerate if throughput volumes can more than offset a decline in average tariff rates in the second half of 2017F and beyond.


Valuation


  • Maintain HOLD with Target Price of US$0.42. Our TP is based on a discounted cash flow valuation framework (weighted average cost of capital of 7.4% and terminal growth rate of 0%).
  • After recently cutting FY17F DPU forecast to 22HKcts, we see the prospective yield of 6.9% as fair.


Key Risks to Our View


  • A global recession would materially impact trade and throughput numbers for HPHT, which would then have an impact on the group’s earnings and cash flows, and ultimately dividend payout.






Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2017-07-21
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.420 Same 0.420



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