Hutchison Port Holdings Trust - Acquire or be acquired
- HPHT stands at a crossroads given its sluggish outlook, declining DPU and depressed stock price.
- Acquisitions could help boost longer-term growth.
- Privatisation by major shareholders cannot be ruled out.
- Maintain BUY, TP S$0.48.
Unexciting outlook but stock looks oversold – BUY.
- Hutchison Port Holdings Trust (HPHT) offers investors an attractive 8.3% prospective yield even after our DPU forecast cut, and looks oversold at the current price level.
- Further upside could come from a stronger-than-expected recovery in China’s exports, acquisition driven growth or privatisation by its major shareholders.
Potential for acquisition-driven growth as organic growth stalls.
- Aside from the acquisition of ACT in 2013, which was partially sold down soon after, and declining to acquire a 50% equity interest in Zhuhai International Container Terminals, all has been quiet on the inorganic front for HPH Trust since 2011.
- Given that DPU is a critical factor for share price, we opine that HPH Trust should look out for acquisitions to boost longer-term DPU, taking into account its relatively benign gearing level.
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 strategic assets.
- Notably, major shareholders CK Hutchison themselves are no strangers to privatisations.
Lowering FY17F EPS forecast by 4% and cutting FY17F DPU to HK 27cts.
- Amidst continued uncertainty in the outlook for global trade, we have cut throughput growth assumptions for FY17 and also factored in higher interest costs ahead – leading to a 4% cut in our FY17F EPS forecast.
- We have also lowered our DPU forecast for FY17F to HK 27cts from HK 30cts previously.
- 20% potential upside to TP of US$0.48 and 8.3% prospective yield is attractive as a defensive play.
- Our TP is based on a discounted cash flow valuation framework (weighted average cost of capital of 7% and terminal growth rate of 0%).
- While we have cut FY17F DPU forecast to HK 27cts, the prospective yield of 8.3% is attractive after a recent price correction.
Key Risks to Our View
- 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.