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Author: kimeng   |   Latest post: Wed, 23 Oct 2019, 5:40 PM

 

Hutchison Port Holdings Trust: HK$12.3b Non-cash Impairment

Author:   |    Publish date:


  • NAV per share down 31% QoQ
  • Revisiting our thesis
  • Downgrade to SELL as at 12 Feb close

Very Large Goodwill Impairment

Hutchison Port Holdings Trust’s (HPHT) FY18 revenue dropped 0.6% YoY to HK$11.5b, with operating profit decreasing 1.4% YoY to HK$3.6b. FY18 core PATMI dropped 22% YoY to HK$738m and came up to 99.1% of our initial full-year forecast. FY18 DPU came to 17.00 HK cents. However, the non-cash impairment of HK$12.3b (which includes a HK$11.4b goodwill impairment) was a large disappointment.

With reference to the asset impairment, management noted

  1. mounting global trade uncertainties,
  2. behavioral changes in MNCs caused by trade tensions (including the accelerating diversification of production bases outside China), and
  3. effects from structural changes within the shipping line industry.

While management does not expect a large drop in throughput volumes this year (Jan’s throughput figures for export to the US was up YoY), they have adjusted assumptions on longer-term growth.

Trading at 0.66x P/B as at 12 Feb

The non-cash impairment reduces NAV per unit by 31% QoQ to HK$3.07 or ~US$0.39, which in turn means HPHT is trading at a historical P/B of 0.66x, using 12 Feb’s closing price. While this figure is still below the 5-year average of 0.73x, we no longer find HPHT’s price levels attractive given the macro uncertainties. In terms of the potential for future write-downs in goodwill, we believe the latest set of long-term volume growth assumptions used for Yantian of 1-3% are realistic for now. There is no more goodwill relating to Kwai Tsing.

Sticking to Three More Years of Voluntary Debt Repayment

Despite the expected Fed pause this year, management appears to be committed to continuing with three more years of voluntary debt repayment. Given that the program was artificially depressing distributions to unitholders (by ~11.5 HK cents a year), we were disappointed by management’s response.

In other updates, we note that the Competition Commission has opened an investigation into the Seaport Joint Operating Alliance in Kwai Tsing. While we do expect cost savings from the cooperation, we await further updates on this issue.

After adjustments, our fair value drops to US$0.22 and we downgrade to SELL.

Revisiting our earlier Buy thesis and current downgrade to SELL, we note that while operational metrics did remain relatively stable in FY18 and progress has been made with the trade situation, we failed to anticipate

  1. the large goodwill write-down,
  2. the low DPU guidance of 11 to 17 HK cents for FY19, and
  3. diminishing prospects of an early termination of the voluntary debt program.

Source: OCBC Research - 13 Feb 2019

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