DBS Group Research has upgraded its rating for Hutchinson Port Holdings Trust (HPH Trust) to “buy” from “hold” with a target price of 14 US cents (19.1 cents), up from the previous target price of 12 US cents.
Analyst Paul Yong said HPH Trust’s current yield of 11.3% is an attractive level to enter, along with an improving distribution per unit (DPU) outlook as a catalyst for share price to re-rate in the longer term.
DBS raised their forecasted DPU for FY20 to 9 HK cents (1.5 cents), up from 8 HK cents previously, after factoring in lower finance costs and government subsidies, as well as expectations of a stronger second half performance as many countries start to relax social distancing measures.
Hence, Yong expects a higher DPU for the 2H20, as compared to the first half’s 4.3 HK cents. As for FY21, the analyst projects a DPU of 10 HK cents, as the global economy recovers and drives higher throughput for HPH Trust.
He elaborated that while daily new Covid-19 cases continue to rise globally, social distancing measures have eased off considerably, which should drive higher economic activity and consumption. This should lead to higher throughput for HPH Trust in the 2H20 as compared to the 1H20, taking into account that the second half is also seasonally stronger.
However, Hong Kong has reimposed tougher social distancing measures lately as it saw a new spike in Covid-19 infections. While wearing masks are now being made mandatory, the tightened measures have also called for the closure of several businesses, especially those in the fitness, beauty and nightlife industries.
On the other hand, Yong noted that the China PMI: New Export Orders, as well as throughput for both Yantian port and Hong Kong port all saw significant month-on-month improvements in June.
Furthermore, HPH Trust’s debt repayment programme is expected to end in 2021, which could pave the way for higher dividends from 2022 onwards.
HPH Trust is now in the fourth year of its five-year HK$1 billion per annum debt repayment plan, which has seen its total debt level drop and gross debt to EBITDA ratio stabilise. “Barring an extension to the debt repayment plan, there would be room for HPH Trust to raise its DPU payout from 2022 onwards.” Yong adds.
The trust is also helped by the current low interest rate environment. Interest rates have fallen significantly since the beginning of the year, with the 3-month US LIBOR falling from 1.90 at the start of January 2020 to 0.27 currently, as the Fed cut rates to shore up the economy.
”With interest rates expected to stay low in the next 12-18 months, HPH Trust will continue to benefit from lower interest costs, as it did in its 1H20 interim results,” adds Yong.
As at 12:15pm, HPH Trust was trading flat at 10 US cents, with a FY20 P/BV value of 0.3 times and a dividend yield of 11.4%.
