Hutchison Port Holdings Trust - DBS Research 2017-02-13: Disappointing DPU guidance

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HUTCHISON PORT HOLDINGS TRUST NS8U.SI

Hutchison Port Holdings Trust - Disappointing DPU guidance

• FY16 earnings of HK$1,714m and DPU of 30.6 HKcts were in line with expectations.
• DPU guidance of 20-23 HKcts for 2017 is lower than our previous forecast.
• We now assume lower DPU of 22 HKcts per year in 2017 and 2018.
• Downgrade to HOLD with TP of US$0.42.

Downgrade to HOLD with TP of US$0.42 as DPU guidance of 20-23 HKcts for 2017 underwhelms. 

• Citing an uncertain business outlook, especially for Hong Kong’s transhipment business and re-iterating the plan to pare down its debt, as well as rising interest rates, Hutchison Port Holdings Trust’s (HPHT) DPU guidance for 2017 now stands at 20-23 HKcts, which is lower than our previous estimate.
• We cut our 2017 and 2018 DPU forecasts to 22 HKcts p.a.
• Given the lower DPU, we have inputed a higher WACC of 7.4% (from 7% previously) for DCF, leading to a lower TP of US$0.42.
• At current price, the prospective yield of 6.4% seems fair.

Tough operating environment as new alliances challenge transshipment volumes. 

• Amid the deteriorating shipping environment, the formation of new shipping alliances (such as Ocean Alliance which is due to commence operations in April 2017) that are increasingly focused on efficiency could put further pressure on transshipment volumes – which are purely viewed as costs to shipping lines.

Project lower earnings of HK$1,445m for FY17F. 

• FY16 earnings of HK$1,714m and 30.6 HKcts DPU were in line with our expectations. 
• For 2017, we project lower earnings of HK$1,445m for the group, mainly as we expect potential tax savings arising from HPHT’s recently approved “High and New Technology Enterprise” status to be more than offset by slightly lower throughput (in Hong Kong) and margins.

Valuation

• Downgrade to HOLD with lower TP 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 cutting FY17F DPU forecast to 22HKcts, we see the prospective yield of 6.4% 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 | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-02-13

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