SINGAPORE (June 7): OCBC Investment Research is maintaining its “buy” call on Hutchison Port Holdings Trust (HPHT) with a lower fair value of 37.5 US cents compared to 43 US cents previously after updating beta assumptions, which has resulted a higher cost of equity of 10% from 8.8% before.
In a Thursday report, lead analyst Deborah Ong says the continued “buy” rating comes in view of the significant value she sees at HPHT’s current unit price, especially given the 22.4% upside to her fair value estimate with an 8.8% FY18F yield as at the trust’s Wednesday close of 30.5 US cents.
Despite HPHT’s 26.5% unit price underperformance YTD, Ong notes that it has rallied 10.9% in less than a week since June 1 and 7% on June 6 alone, with still more room to go.
In the analyst’s view, the depressed YTD performance is mainly due to the market’s reaction to China’s National Development and Reform Commission’s (NDRC) announcement of a 30% cut in the “list price” for Shenzhen ports; ongoing trade tensions between US & China; and most recently, the removal which has prompted selling from index and institutional funds.
However, Ong thinks there will be little impact operationally on HPHT in the case of the first two factors, and no change in fundamentals following the third.
“First, for NDRC, we estimate that HPHT’s Yantian is already charging below the new list price and believe 1Q18 results indicate that these fears have indeed been overblown. Second, with regard to the US-China trade war, the list of goods targeted in the proposed US tariffs on US$50 billion of Chinese goods make up <2% of HPHT’s throughput,” explains Ong.
“Furthermore, we believe it would be unrealistic to assume that this throughput related to these goods would cease completely as a result of tariffs,” she adds.
Highlighting that government-related actions remain highly predictable and volatile, Ong nonetheless sees a possibility for the NDRC to come back with more cost reduction measures within the logistics industry, as well as a worsening US-China trade situation.
“With regard to the longer term outlook for HPHT, we note that distributions are currently ‘depressed’. Cash that could be distributed is currently being used to voluntarily pay back HK$1 billion of debt (~11.5 HK cents per unit) annually from FY17 to FY21 to help offset the rise of interest rates,” says the analyst.
As at 10.39am, units in HPHT are trading 1.6% lower at 30 US cents, which imply a FY18F distribution yield of 8.7%.
