DBS Group Research analysts have maintained their “buy” call for Hutchison Port Holdings Trust (HPHT) P7VU with a lower target price of 32 cents from 37 cents previously as they look forward to a “more promising” 2HFY2023 ending Dec 2023.
In their report dated July 26, analysts Paul Yong and Tabitha Foo note that 1HFY2023 was a “challenging period” for the leading port operator in Hong Kong and Shenzhen with lower throughput volumes, significant loss in storage income, a weaker Chinese Yuan and higher interest rates during the period.
HPHT reported 1HFY2023 net profit of HK$94.9 million ($16.1 million), forming only 8% of the analysts’ full-year forecast. Revenue fell by 20% y-o-y to HK$5,183 million for the period from HK$6,472 million in 1HFY2022.
Additionally, the analysts note that HPHT saw higher expenses on cost initiatives, partially offset by the reduction of throughput volumes and the relaxation of Covid-19 measures, as well as higher interest costs that was mitigated by its debt repayment programme. Meanwhile,
taxation increased after the pandemic as some of the tax benefits at Yantian expired.
They have cut their FY2023 and FY2024 earnings estimates by 47% and 43%, respectively, mainly to reflect the underperformance in 1HFY2023. Their target price has been lowered accordingly to 32 cents based on a discounted cash flow (DCF) valuation, which features a 7.5% weighted average cost of capital (WACC) and 10.0% cost of equity.
Nonetheless, Yong and Foo say they believe that the “worst is over” and that they are optimistic on a pick-up in throughput volumes in 2H2023 as trade momentum improves.
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“While export volumes from China to the EU are still contracting, the decline has been slowing and we anticipate a turnaround in 2H2023 as retailers have to replenish their inventory that has been depleting. Export volumes from China to the US could remain muted into 3Q2023 but will likely improve in 4Q2023,” they say.
However, they add the caveat that pace of recovery for Hong Kong ports will likely remain slow as volumes are still under pressure.
Expressing its management’s optimism on 2HFY2023, and especially on the last quarter of the year, HPHT maintained its dividend per unit (DPU) guidance at 14.5 HK cents for FY2023, the same as in FY2022. It announced an interim DPU of 5.5 HK cents in 1HFY2023 despite the sharp drop in 1HFY2023 net profit.
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The analysts note that the company’s interim dividend DPU for the period was only marginally lower than the 6.5 HK cents issued for 1HFY2022 and therefore believe there is room for the company’s dividends per unit (DPU) to be raised in FY2024.
They have adjusted their DPU estimates down from 15 HK cents and 20 HK cents in FY2023 and FY2024 to 14.5 HK cents and 16.0 HK cents, respectively, which still imply attractive yields of 9.6% and 10.6%, respectively.
With strong cash flow generation and a rapidly improving balance sheet,Yong and Foo anticipate that HPHT still has the “capacity” to pay out more dividends as it deleverages to an all-time low. HPHT’s gearing ratio is projected to remain low at 2.3-2.5x in FY23F/24F following a multi-year debt repayment programme.
Although HPHT’s current berths are already operating at optimal levels, the analysts add that new capacity of around 3.4 million twenty-foot equivalent units (TEUs) from Yantian East Port — in which HPHT holds a 38.73% effective stake — will come on stream from 2025 onwards to support its long-term growth.
As at 2.45pm, shares in HPHT were trading 0.5 cents or 2% down at 24.5 cents.
