DBS Group Research 2015-07-23: Hutchison Port Holdings Trust - Lower dividends as expected. Maintain HOLD.

Lower dividends as expected 

  • 2Q net profit rose 8.5% y-o-y to HK$400m on 2.1% y-o-y growth in revenue to HK$3,128m. 
  • Interim dividend of HK 15.7cts compared to HK 18.7cts last year; in line with expectations. 
  • Earnings could see modest improvement but the restart of its capex programme means dividend payout will remain subdued for now. 
  • Maintain HOLD for its > 7% dividend yield, TP of US$0.65 is based on DCF. 


Flat interim core earnings. 

  • Revenue at half time rose 1% y-o- y to HK$6,076m, and excluding a gain on disposal of 60% of ACT in 2014 of HK244m, PATMI would have been flat at HK$686m. 
  • Throughput handled in Hong Kong dropped 2% y-o-y while those handled in Yantian grew 7% y-o-y for an overall growth of 2% y-o-y. 
  • The Group benefitted from lower fuel costs, which were offset by higher financing costs and taxes, resulting in a flat core net earnings attributable to shareholders. 

Dividends reduced as capex increases. 

  • HPHT declared an interim dividend of HK 15.7cts, which is 16% lower than last year, and reflects the fact that HPHT is re-starting its capital expenditure programme to build three new berths in Yantian. 


Mixed outlook. 

  • In terms of outlook, outward bound cargoes to the US have shown an encouraging upward trend and is likely to continue on a mild recovery path over the rest of the year, however this could be offset by continued softness in outward cargoes to Europe. 
  • Building three new berths in Yantian over the next three years, leading to lower dividends. HPHT is also looking to re- start its capital expenditure program this year in Yantian, which is the key reason why dividends are expected to be cut this year (even though we expect core earnings to be stable) by c. 15% to US 4.5cts. 

Upside could come from tariff hikes. 

  • HPHT has plans to raise its tariff this year by about 4%-6% as it ramps up capacity to handle the larger mega-vessels that are increasingly calling its ports more often. 
  • If successful, this could help drive a modest improvement in revenues over the next two years, and soften the impact from the restarting of the Group's capital expenditure program on its cash flows and dividends. 


  • Our US$0.65 TP is based on a discounted cash flow valuation framework (weighted average cost of capital of 7.0% and terminal growth rate of 1%). 
  • While the business continues to generate good cash flows, management is looking to bring dividend payouts closer to actual operating cash flows, as further deferral of capex looks unlikely. 
  • Hence, DPU is likely to be reduced to around HK 34-35cts in FY15/16 from a payout of HK 41cts in FY14. 

Key Risks: 

Transhipment cargoes open to competition. 

  • About 60% of Hong Kong Port volumes are transhipment cargoes, which are subject to competition from other regional ports like Singapore, Shanghai and Busan. Hence, pricing for transhipment cargoes is likely to be continuously under pressure. 
  • Higher effective tax rates at Yantian Port will offset some of the operating profit growth.


Source: http://www.dbsvickers.com/