● Hutchison Port Holdings Trust (HPHT) announced pre-ex NPAT of HK$526 mn for 3Q15, up 16% on last year's HK$453 mn, slightly ahead of our HK$511 mn estimate and well ahead of consensus at HK$437 mn.
● Despite declining volumes at its key HIT berths, an ASP increase of almost 16% and adroit cost management saw HPHT turn in its best margin performance since 3Q11 on the back of 2% rise in revenue.
● The final quarter of the year will likely feature much of the same— poor throughput volumes, offset by rising revenue/TEU and reduction in semi-variable costs as volumes decline. We have raised our NPAT estimates by 1% this year to capture this.
● We have also raised our rating for HPHT from Underperform to NEUTRAL and our TP by 7% to US$0.59/unit. We believe that the company should trade on a real yield of 6.3% (i.e., after backing out what it borrows to meet its distribution target), based on its rate of distribution growth relative to other trust structures.
Tariff increase and cost controls insulate earnings
An 11% rise in EBIT on a 2% growth in revenue saw HPHT's operating margin jump to 38%—its best since listing, bar 3Q11. A continuous reduction in costs was a key driver with these down 1% in unit terms as HPHT was able to adjust its labour force, especially, in line with the lower volumes handled. We infer that September was a disastrous month in throughput terms given previous discussions with management and some of the data out of Taiwanese shipping companies, as TEU numbers fell 4% more than anticipated and were down 10% YoY at HIT (Hutchison International Terminals). Most of the lost volumes, however, were empties or low-margin transhipments, and so HIT's mix improvement, combined with the 6% tariff increase implemented in 2Q, drove ASPs up by close to 16% YoY.
Yantian International Container Terminal's (YICT) performance was not as robust, despite a 5% rise in throughput. As distinct from HIT, most of its growth was transhipment/empties related, which drove ASPs down 4% and resulted in a similar contribution to earnings as HIT, despite YICT accounting for >60% of group revenue.
Looking forward, management remains bearish on volumes and notes the reduction in transhipment especially as HPHT's liner customers try to save costs by limiting moves and voiding sailings. They also note the possible disruption to sailing schedules stemming from a potential reorganisation of shipping alliances, should CSCL and COSCO merge and highlight terminal realignment costs associated with this. Revenue, however, should be lifted modestly by the same factors evident in 3Q and management remains confident of distributing its target of HK$0.33-0.35/unit for the year as a whole. This is unlikely to be financed out of distributable cash flow, however, and we believe that—in the absence of assets sales—HPHT will have to borrow about 16% more than it earns to achieve the bottom of its target range.
As we give HPHT no credit for borrowing to make distributions, our yield target backs the financed component out. We believe that the company should be paying an adjusted yield of 6.3% when compared with its two year rate of distribution growth and comparable SGX-listed entities (REITS, shipping trusts and other business trusts) and this underpins our better target price. It is hard to get too positive on a company whose core business appears to be dwindling; however, we feel that there is little downside to its stock price from its current lows. (Read Report)
Read Related Reports
1) Hutchison Port Holdings Trust - Margins improve on higher ASPs by DBS Group Research, published on 26 October 2015
2) Hutchison Port Holdings Trust- Tough industry conditions prevail by OCBC Investment Research, published on 26 October 2015
Source : Credit Suisse Asia Pacific Equity Research