Hutchison Port Holdings Trust - DBS Research 2016-07-28: Down but not out

Hutchison Port Holdings Trust - DBS Research 2016-07-28: Down but not out HPH TRUST HUTCHISON PORT HOLDINGS TRUST NS8U.SI 

Hutchison Port Holdings Trust - Down but not out

  • 2q16 revenue fell more than expected as throughput volumes disappointed, dropping 7%.
  • Core net profit of HK$541m (-21% y-o-y) in 1H16 helped by efficiency gains of c.10% - largely in line.
  • DPU forecast of 30 HK cts for FY16F is intact.
  • Maintain BUY, TP lowered slightly to US$0.56.



Defensive yield play. 

  • Hutchison Port Holdings Trust (HPHT) offers investors an attractive 8% yield, supported by cash flow generated from its port operations in Shenzhen and Hong Kong, where it has a leading market share. 
  • While a planned debt repayment programme from 2017F onwards could cap DPU growth in the medium term, a rebound in trade volumes and throughput as well as a stronger balance sheet thereafter should support longer-term expansion.


Still a weak quarter, but an improvement vs 1Q16. 

  • Overall throughput numbers continue to be dragged by weak transshipment volumes, falling 7% y-o-y. Despite this, HPHT was still able to deliver an improvement in performance q-o-q, mainly on successful execution of planned tariff increases and as ongoing efficiency initiatives bear fruit.
  • Lowering earnings for FY16F/FY17F modestly by 1.6%/0.8% but DPU forecast of 30 HK cts is intact. We have lowered our throughput growth assumptions for FY16/17F and thus trim our FY16F and FY17F core profit forecasts by 2.0% and 0.8% respectively. Meanwhile, DPU forecast of 30 HK cts remains unchanged.


Debt repayment plan explained. 

  • HPHT disclosed that it will look to repay a minimum of HK$1bn of debt annually beginning from 2017 to lower its gearing level and improve its interest coverage ratios in a rising interest rate environment. 
  • Including mandatory amortisation of term loans and contributions from non-controlling interests on debt repayment, we estimate this would result in a HK$300-350m use of cash per annum that could potentially lower distributable income by 11-13%, assuming earnings and cash flow do not improve significantly beyond 2017F.


Valuation:

  • 15% potential upside to TP of US$0.56 and 8% yield is attractive as a defensive play. Our TP is based on a discounted cash flow valuation framework (weighted average cost of capital of 7% and terminal growth rate of 0%). 
  • DPU is projected to be lower at c. 30 HK cts in FY16F from 34.4 HK cts in FY15, but still offers an attractive yield of c. 8%.


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/ 2016-07-28
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.56 Down 0.57


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