Hutchison Port Holdings Trust - DBS Research 2018-07-24: Choppy Seas

HUTCHISON PORT HOLDINGS TRUST SGX:NS8U

Hutchison Port Holdings Trust (HPHT) - Choppy Seas

HPHT's 2Q earnings and DPU of 8.52 HK cts (-10.4% y-o-y) below expectations on weak volumes in Hong Kong.
An escalation in the US-China trade war would impact the Trust’s volumes and cash flows.
FY18 DPU guidance lowered to 17-20 HK cts.
Downgrade to HOLD, Target Price US$0.28.

Given the Hong Kong operations’ ongoing struggles with profitability and management’s reduced DPU guidance, we have cut our FY18F and FY19F earnings forecasts for HPHT by 12% and 19% respectively, as well as reduced our DPU forecast for FY18F and FY19F from 20.6 HK cts to 18 HK cts for each year.
While > 8% yield is on offer, which should support share price in the near term, the stock may struggle to re-rate until it addresses concerns over the profitability of its Hong Kong operations.

We cut our FY18F and FY19F DPU forecast from 20.6 HK cts each to 18 HK cts for both years.

HPHT’s share price could re-rate if throughput volumes can drive better-than-expected revenues and cash flows in the quarters ahead.
DPU guidance lowered to 17-20 HK cts for FY18. Citing the weak performance in Hong Kong in 2Q18 and uncertainty over its throughput outlook due to the ongoing US-China trade war situation, HPHT cut its FY18 DPU guidance to 17-20 HK cts from 20-23 HK cts previously.

HOLD, Target Price US$0.28. Our Target Price is based on a discounted cash flow valuation framework (weighted average cost of capital of 8.6% and terminal growth rate of 0%).
We have adjusted our WACC assumption upwards to account for higher earnings volatility in view of the US-China trade war situation.

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.

The combined throughput in Hong Kong fell by 7.2% y-o-y, mainly due to a decline in transshipment cargoes, while Yantian also saw a 4.1% y-o-y decline in volumes, which was mainly due to a drop in empty cargoes.
At half-time, revenue declined by 0.3% y-o-y to HK$5,457m as the combined throughput in Hong Kong declined by 3.3%, offset by a 1.8% increase in throughput at Yantian.

As a result of higher operating costs and a 3.6% y-o-y decline in revenue, operating profit fell by 12.4% y-o-y to HK$837m. Interest costs were higher by c. 20% y-o-y on higher rates and pretax earnings declined 22.5% y-o-y to HK$757m. With Yantian performing relatively better than Hong Kong, which is largely wholly owned, PATMI fell by 37% to HK$170m.
Interim earnings declined by 28% y-o-y to HKS$315m even as PAT fell by a lower 5% y-o-y, highlighting the continued weak performance of HPHT’s Hong Kong operations.

As a result of lower earnings and cash flow, HPHT lowered its interim dividend from 9.5 HK cts a year ago to 8.52 HK cts for the current interim period.

Citing the weak performance in Hong Kong in 2Q18 and uncertainty over its throughput outlook due to the ongoing US-China trade war situation, HPHT cut its FY18 DPU guidance to 17-20 HK cts from 20-23 HK cts previously.
Given the Hong Kong operations’ ongoing struggles with profitability and management’s reduced DPU guidance, we have cut our FY18F and FY19F earnings forecasts by 12% and 19% respectively, as well as reduced our DPU forecasts for FY18F and FY19F from 20.6 HK cts to 18 HK cts for each year.

Paul YONG CFA DBS Group Research Research | https://www.dbsvickers.com/ 2018-07-24

SGX Stock Analyst Report HOLD Downgrade BUY 0.28 Down 0.380