Hutchison Port Holdings Trust (HPHT)’s acquisition of Asia Container Terminal (ACT) at a total enterprise value of HKD3,917m, to be funded by debt, is expected to be EPU and DPS accretive. It will reap economies of scale, from the enlarged clientele base, and cost synergies. Forecasting a higher DPU yield of 7%-8% for FY13-FY15, we are upgrading HPHT to a BUY, with our FV revised up to USD0.85.

Expanding through acquisitions. HPHT announced that it is acquiring a 100% stake in ACT, which owns two competing neighbouring berths at Container Terminal 8 West, Kwai Chung, Hong Kong, for a total cash of HKD3,167m, from DP World and PSA China Pte Ltd. In addition, HPHT will also fully pay off ACT’s debt of HKD750m owed to its previous shareholders. The acquisition will be fully debt-funded. HPHT will be drawing down a total of HKD4bn from its credit facility granted by banks, which will raise its net gearing from 27.7% to 32%.

A fair deal. There were no details on ACT’s earnings but we believe its profitability profile should be similar to HPHT’s. Assuming similar TEU yields and profitability margin as achieved by HPHT in FY12, the deal is valued at 12.6x EV/EBITDA, which is fair, given that HPHT’s FY12 EV/EBITDA stands at 12.3x. EPU and DPU accretive acquisition. The acquisition is seen to be both EPS and DPU accretive due to the resulting higher market share and enlarged liner clientele base, which would boost economies of scale and cost synergies on improvements in operating efficiencies. We raise our earnings projections by 2% / 0.5% respectively for FY13 / FY14. We also introduce our FY15 numbers.

We forecast FY15 earnings to grow by 2.6%. Consequently, this raises our DPU projections from HKD0.46/share for FY13 and FY14 to HKD0.47 and HKD0.49 per share respectively, translating to a yield of 7%-8% for FY13-FY15. Upgrade to BUY. With a total capital appreciation (incl. dividend yield) upside of 14% we upgrade HPHT to a BUY from NEUTRAL, with our FV revised up to USD0.85 from USD0.79.

Source: OSK/DMG Research - 11 Mar 2013