Hutchison Port Holdings Trust - DBS Research 2018-04-16: Value Emerges With 8% Yield

Hutchison Port Holdings Trust - DBS Vickers 2018-04-16: Value Emerges With 8% Yield HUTCHISON PORT HOLDINGS TRUST NS8U.SI

Hutchison Port Holdings Trust - Value Emerges With 8% Yield

  • 1Q18 earnings disappoint as HK operations lag.
  • We project FY18F dividend to be flat from FY17.
  • Hutchison Port Holdings Trust (HPHT) is now the highest yielding large cap stock in Singapore.
  • Upgrade to BUY, Target Price US$0.38.



Upgrade to BUY with Target Price of US$0.38. 

  • With Hutchison Port Holdings Trust (HPHT)’s share price declining by over 10% since it reported its FY17 results, we believe value has emerged at the current price level, implying a dividend yield of 8%. 
  • While earnings remain unexciting given on-going price pressures, HPHT’s operations are generating sufficient cash flows to support a generous dividend payout.


Where We Differ:

  • We project FY18F dividend to stay flat from FY17 at 20.6 HK cts vs. guided range of 20-23 HK cts.


Potential catalysts: 

  • HPHT’s share price could re-rate if throughput volumes can more than offset a decline in average tariff rates in the quarters ahead.


1Q18 earnings below expectations. 

  • Despite a 3.5% y-o-y improvement in overall revenue to HK$2,667m, HPHT’s net profit fell by 13% y-o-y to HK$145m as its wholly-owned Hong Kong operations continued to lag. Throughput at 52%-owned Yantian Port rose by 9% y-o-y while average revenue per TEU declined by an estimated 1% (due to a higher mix of transshipment and empty boxes, offset by a stronger RMB).
  • Meanwhile, volumes at Hong Kong (including COSCO-HIT and ACT) was higher by 1% y-o-y, but average revenue per TEU fell by an estimated 6% y-o-y.


Valuation


Upgrade to BUY, Target Price US$0.38. 

  • Our Target Price is based on a discounted cash flow valuation framework (weighted average cost of capital of 7.4% and terminal growth rate of 0%). 
  • HPHT is now the highest yielding large cap stock in Singapore.


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.



WHAT’S NEW - 1Q18 earnings below expectations as HK operations lag 


Revenue improves on higher throughput volumes: 

  • Despite a 3.5% y-o-y improvement in overall revenue to HK$2,667m, HPHT’s net profit fell by 13% y-o-y to HK$145m as its wholly-owned Hong Kong operations continued to lag. Throughput at 52%-owned Yantian Port rose by 9% y-o-y while average revenue per TEU declined by an estimated 1% (due to a higher mix of transshipment and empty boxes, offset by a stronger RMB). 
  • Meanwhile, volumes at Hong Kong (including COSCO-HIT and ACT) was higher by 1% y-o-y, but average revenue per TEU fell by an estimated 6% y-o-y.

Yantian operations continue to outperform Hong Kong: 

  • Operating profit increased 7.6% y-o-y to HK$783m, mainly due to forex gains of HK$45m and HK$20m in dividends from River Ports Economics Benefits deferred from 2017.
  • Interest costs rose by 18% y-o-y to HK$229m on higher interest rates while contributions from joint ventures fell by 50% y-o-y to HK$8.5m and contributions from associates (Huizhou International Container Terminal) worsened by 16% y-o-y to HK$33.9m. 
  • Pretax earnings rose by 1% to HK$509m but due to Yantian operations outperforming Hong Kong operations, non-controlling interests increased 32% y-o-y to HK$276m, and PATMI fell by 13% y-o-y.

Minimal impact expected from NDRC announcement and trade war. 

  • During the 1Q18 earnings call, HPHT mentioned that there was no significant impact on effective tariff rates at Yantian Port in 1Q18 following NDRC’s (National Development and Reform Commission) announcement of a cut in published rates and that there should not be any material impact from the US-China trade war as the list of goods affected thus far do not form a significant portion of exports out of Yantian Port.




Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2018-04-16
DBS Vickers SGX Stock Analyst Report BUY Upgrade HOLD 0.38 Down 0.390



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