Hutchison Port Holdings Trust - OCBC Investment 2016-07-14: Brexit implications and debt amortization

HUTCHISON PORT HOLDINGS TRUST NS8U.SI

Hutchison Port Holdings Trust: Brexit implications and debt amortization

Year-to-date, Hong Kong Port Container Throughput (Kwai Tsing Terminals) has fallen 10.1% while China Shenzhen Container Throughput is up 0.7%.
For May alone, HK container throughput was down 6.1% while Shenzhen’s was up 5.6%. We find it unlikely that there will be a strong enough recovery in HPHT’s throughput in 2H to end the year flat for HK, as guided by the management. Based on the May figures alone, we keep to our projections for throughput growth: -6.0% for HPHT’s HK terminals and 3.0% for YICT in FY16.

At this point in time, the implications from Brexit are unclear. In the case of regional or worldwide depressed economic activity following Brexit, shipping activity would be affected. Furthermore, a weakened Euro would dampen purchasing power for Chinese goods, thereby affecting the outbound cargos from HPHT’s ports. The euro has weakened ~1.0% against the yuan since 23 Jun.
In FY15, Europe accounted for 6% of HIT, COSCO-HIT and ACT’s weekly services and accounted for 28% of YICT’s.
Considering the lack of clarity regarding the implications of Brexit, we keep our FY16 throughput growth assumption for both HPHT’s HK terminals and YICT.

Given that the Fed guidance for 2016 has fallen from four quarter-point increases at the end of last year to two hikes in Mar to less than two hikes, we expect the pace of rate hikes to be significantly slower in the next few years than originally anticipated at the start of 2016. Consequently, we expect HPHT’s management to adjust their pace of repayment from what was formally announced at the 1Q16 briefing, spreading the amortization of debt over 7 years instead of 5 years. This assumes that HPHT keeps to its target of its Consolidated Gross Debt to EBITDA ratio of 4x.

Based on closing prices, HPHT’s share price dipped 6.7% in the three days following Brexit before rallying 9.6% to yesterday’s closing price of US$0.455, likely on yield play fund flows. HPHT is now 2.2% above its closing price of US$0.445 on 23 Jun.
Our FY16 DPU forecast remains at 28 HK cents, assuming an 88% payout of distributable income. This is below management’s guidance of 30 to 32 HK cents.
Our FY17 forecast rises from 28 HK cents to 30 HK cents and our fair value increases from US$0.41 to US$0.43.
HPHT is currently trading at a FY16 yield of 7.9% and FY17 yield of 8.5%.
Maintain HOLD with a fair value estimate of US$0.43.

Deborah Ong OCBC Securities | http://www.ocbcresearch.com/ 2016-07-14

OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.43 Up 0.41