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Broker's take: OCBC upgrades Hutchison Port Holdings Trust to 'buy'

OCBC Investment Research has upgraded its rating on Hutchison Port Holdings Trust (HPH Trust) from "hold" to "buy", raising its fair value estimate of the counter from US$0.42 to US$0.43.

As at 11.18am on Tuesday, units of HPH Trust (USD) were trading 4 per cent, or 1.5 Singapore cents lower to US$0.36 apiece. Some 10.6 million units changed hands.

In general, OCBC analysts Deborah Ong and Eugene Chua view the group's results as within expectations.

"FY17 revenue was down 3 per cent year on year to HK$11.6 billion (S$2 billion), or 98.1 per cent of our full-year forecast, with Q4 FY17 revenue down 3.4 per cent year on year at at HK$2.9 billion."

Excluding Hongkong International Terminals' (HIT) rent and rates refund in FY16, FY17's profit after tax and minority interests was HK$2.2 billion, down 15 per cent year on year. Distribution per unit for FY17 came to 20.60 HK cents, down from 30.60 HK cents the previous year.

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"All-in-all, full-year throughput for HPH Trust's ports increased 8 per cent year on year with Yantian International Container Terminals' (YICT) throughput increasing due to growth in US and transhipment cargoes; and Kwai Tsing throughput increasing 5 per cent on the back of stronger transhipment volume," the analysts said.

As announced on Feb 1, the National Development and Reform Commission (NDRC) has reduced the "list price" or reference tariff rate for origin and destination foreign trade containers at Shenzhen - Yantian ports from 1,400 yuan/TEU (twenty-foot equivalent unit) to 980 yuan/TEU.

"While we believe the recent regulatory measures has tangible implications for the industry, we see the impact on HPH Trust as a whole as being significantly muted than what headlines would suggest," the OCBC analysts said.

Based on their research, HPH Trust's 7 per cent price correction on Feb 2 has been too severe, and represents an "over-reaction" in the market.

"Though YICT contributes about 64 per cent to HPH Trust's topline, it contributes less to the bottom line as a 50+ per cent owned subsidiary of HPH Trust. Furthermore, we estimate that YICT's average selling price (ASP) is already about 50 per cent below the new "list price" tariff, which should allow the port operator some buffer in negotiations going forward," the brokers said.

Looking ahead, the analysts forecast single-digit throughput growth in FY18.

"We also believe the bulk of sharp ASP declines is behind us, though we expect mild softness in tariff rates going forward. In our view, the main headwind for HPH Trust is the increase in interest costs; we currently assume three rate hikes each for 2018 and 2019."

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