Singapore Company Guide Hutchison Port Holdings Trust Version 5 | Bloomberg: HPHT SP | Reuters: HPHT.SI Refer to important disclosures at the end of this report DBS Group Research . Equity 8 Dec 2016 BUY Acquire or be acquired Last Traded Price ( 7 Dec 2016): US$0.42 (STI : 2,959.84) Price Target 12-mth: US$0.48 (14% upside) (Prev US$0.56) Unexciting outlook but stock looks oversold – BUY. Hutchison Port Holdings Trust (HPHT) offers investors an attractive 8.3% Potential Catalyst: Recovery in throughput volumes prospective yield even after our DPU forecast cut, and looks Where we differ: We have higher than consensus EPS and DPU forecasts oversold at the current price level. Further upside could come from Analyst a stronger-than-expected recovery in China’s exports, acquisition- Paul YONG CFA +65 6682 3712 [email protected] driven growth or privatisation by its major shareholders. Singapore Research Team Potential for acquisition-driven growth as organic growth stalls. What’s New Aside from the acquisition of ACT in 2013, which was partially HPHT stands at a crossroads given its sluggish sold down soon after, and declining to acquire a 50% equity outlook, declining DPU and depressed stock price interest in Zhuhai International Container Terminals, all has been quiet on the inorganic front for HPH Trust since 2011. Given that Acquisitions could help boost longer-term growth DPU is a critical factor for share price, we opine that HPH Trust should look out for acquisitions to boost longer-term DPU, taking Privatisation by major shareholders cannot be ruled into account its relatively benign gearing level. out Maintain BUY, TP S$0.48 Could a take-out offer be on the cards if stock price persists at current levels? HPHT’s share price is trading near historic lows, offering a prospective yield of more than 8% in 2017F and at 0.6x FY16 P/BV, could be attractive as an acquisition target given its Price Relative strategic assets. Notably, major shareholders CK Hutchison and US$ Relative Index 0.9 Temasek themselves are no strangers to privatisations. 0.9 210 0.8 190 0.8 170 0.7 150 Lowering FY17F EPS forecast by 4% and cutting FY17F DPU to HK 0.7 130 0.6 110 27cts. Amidst continued uncertainty in the outlook for global 0.6 90 0.5 0.5 70 trade, we have cut throughput growth assumptions for FY17 and 0.4 50 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 also factored in higher interest costs ahead – leading to a 4% cut Hutchison Port Holdings Trust (LHS) Relative STI (RHS) in our FY17F EPS forecast. We have also lowered our DPU forecast for FY17F to HK 27cts from HK 30cts previously. Forecasts and Valuation Valuation: FY Dec (HK$ m) 2015A 2016F 2017F 2018F 20% potential upside to TP of US$0.48 and 8.3% prospective Revenue 12,613 12,047 12,411 12,786 yield is attractive as a defensive play. Our TP is based on a EBITDA 7,315 6,977 7,198 7,422 discounted cash flow valuation framework (weighted average Pre-tax Profit 3,870 3,755 3,423 3,471 cost of capital of 7% and terminal growth rate of 0%). While Net Profit 1,745 1,790 1,463 1,483 Net Pft (Pre Ex.) 1,745 1,433 1,463 1,483 we have cut FY17F DPU forecast to HK 27cts, the prospective Net Pft Gth (Pre-ex) (%) 11.6 (17.9) 2.0 1.4 yield of 8.3% is attractive after a recent price correction. EPS (US cts.) 2.58 2.65 2.16 2.20 EPS Pre Ex. (US cts.) 2.58 2.12 2.16 2.20 Key Risks to Our View: EPS Gth Pre Ex (%) 12 (18) 2 1 A global recession would materially impact trade and throughput Diluted EPS (US cts.) 2.58 2.65 2.16 2.20 numbers for HPHT, which would then have an impact on the Net DPS (US cts.) 4.44 3.87 3.48 3.48 group’s earnings and cash flows, and ultimately dividend payout. BV Per Share (US cts.) 63.1 61.8 60.5 62.7 PE (X) 16.3 15.8 19.4 19.1 At A Glance PE Pre Ex. (X) 16.3 19.8 19.4 19.1 EV/EBITDA (X) 10.1 10.7 10.4 9.7 Issued Capital (m shrs) 8,711 Net Div Yield (%) 10.6 9.2 8.3 8.3 Mkt. Cap (US$m/US$m) 3,659 / 3,659 P/Book Value (X) 0.7 0.7 0.7 0.7 Major Shareholders (%) Net Debt/Equity (X) 0.4 0.4 0.5 0.4 Hutchison Ports 27.6 ROAE (%) 4.0 4.2 3.5 3.6 Temasek Holdings 11.0 Earnings Rev (%): 0 (4) N/A Free Float (%) 61.4 Consensus EPS (US cts.): 2.30 2.00 2.13 3m Avg. Daily Val (US$m) 4.8 Other Broker Recs: B: 2 S: 2 H: 6 ICB Industry : Financials / Equity Investment Instruments Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P. ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa:JC, PY Company Guide Hutchison Port Holdings Trust WHAT’S NEW Room for debt-funded acquisition growth. Among business trusts of at least US$1bn listed in Singapore and Hong Kong, DPU, which has been on a decline, is a critical driver of HPH HPH Trust has the lowest net gearing level and also lowest Trust’s share price. Since its IPO in 2011, the 12-month interest costs, which we believe indicates that there is room for outlook for HPH Trust’s DPU has generally been on a decline HPH Trust to embark on debt-funded acquisitions to boost its – from HK 44.5cts in 2011 to HK 26.4cts currently. This has EPS and DPU. primarily been due to flattish revenue growth from tepid throughput numbers and rising cost pressures affecting Gearing and interest cost for selected Business Trusts profits and cash flow. Mkt Cap Net Interest US$m Gearing Cost (%) Next 12 months' DPU vs Share Price for HPH Trust HKT TRUST 9537 87.2% 3.4 1 0.6 HK ELECTRIC INVESTMENTS 8008 84.2% 2.4 0.9 HPH TRUST 3484 45.1% 1.5 0.5 0.8 KEPPEL INFRASTRUCTURE TRUST 1293 105.2% 5.8 JINMAO HOTEL AND JINMAO INV 1011 87.5% 5.1 0.7 0.4 0.6 Source: Company, DBS Bank 0.5 0.3 0.4 Could HPH Trust be a privatisation candidate? A number 0.2 0.3 of companies in the transport sector, including NOL, SMRT, 0.2 Tigerair and China Merchants Pacific, were privatised or 0.1 0.1 acquired in 2016. HPHT’s share price is trading near historic lows, offering a prospective yield of 8.3% in 2017F and at 0.6x 0 0 1/6/2011 1/6/2012 1/6/2013 1/6/2014 1/6/2015 1/6/2016 FY16 P/BV, could be attractive as an acquisition target given its strategic assets. Notably, major shareholders CK Hutchison Price (US$) - LHS NTM DPU (HK$) - RHS (27.6%) and Temasek (11%) themselves are no strangers to Source: DBS Bank, Bloomberg Finance L.P. privatisations or take-out offers. Trading at over +1 SD in terms of dividend yield. HPH Trust has been generally trading at between 7% and 9% dividend Temasek, through PSA (Port Authority of Singapore), is a 20% yield since 2012, though it has been at a higher range in shareholder of Hutchison Ports (which owns 27.6% of HPH 2016, at between 8.5% and 10%. The stock is currently Trust while the remaining 80% of Hutchison Ports is owned by trading at 9.2% FY16F yield, declining to 8.3% for 2017F as CK Hutchison). In 2016, three of the four companies that were we expect the group’s DPU to be lowered going into 2017 taken out were by its major shareholders. and 2018. Dividend yield band for HPH Trust In terms of valuations, we believe HPH Trust’s current P/BV ratio of 0.6x makes it very attractive as a take-out target or privatisation play, especially taking into account that there was 10.0% already a HK$18.8bn write-down in 2013 (c. 30% of book +2sd: 9.5% value) and that the Trust generates very strong cash flows, as +1sd: 8.7% demonstrated by the prospective cash (dividend) yield of over 8%. Avg: 8.0% 8.0% Transport companies acquired or privatised in 2016 -1sd: 7.3% Name Accquirer P/B -2sd: 6.5% Neptune Orient Lines CMA CGM SA 1.05 6.0% SMRT Temasek Holdings 2.74 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Tiger Airways Singapore Airlines 6.12 Source: DBS Bank, Bloomberg Finance L.P. China Merchants Holdings China Merchants Group 1.06 (Pacific) Source: Company, DBS Bank ASIAN INSIGHTS VICKERS SECURITIES Page 2 Company Guide Hutchison Port Holdings Trust 3QFY16 RESULTS REVIEW assumptions and DPU forecast of 30 HK cts for FY16F, which 3Q numbers weaker y-o-y; management more is within HPHT’s DPU guidance of HK 30-32cts. However, we optimistic for 2017 believe that higher interest costs, modest core earnings growth and the debt repayment plan will lead to a lower 9M16 performance in line. HPHT’s 3Q16 revenue fell 7% y- payout in 2017F and we have thereby cut our DPU forecast o-y to HK$3,265m, mainly as soft transshipment and empty for 2017F and 2018F to HK 27cts each.