HPH Trust loses ground as analysts slash earnings forecast

Singapore

THE counter of Hutchison Port Holdings Trust (HPH Trust) lost ground on Monday as analysts slashed earnings forecasts, following a HK$19 billion (S$3.32 billion) impairment charge on goodwill allocated to its cash-generating unit in Hong Kong, which dragged the trust into a net loss of HK$18.6 billion in Q4 FY14, compared to a net profit of HK$334.8 million in the same period a year ago.

With the impairment, the trust's fourth-quarter net book value per share also fell from US$0.96 to US$0.70 while net gearing climbed by almost 0.6 times.

On Monday, HPH Trust's counter fell 4.86 per cent to US$0.685, dragging the Straits Times Index down by about 2.8 points.

The bigger story behind the goodwill impairment is a floundering sentiment for the trust's Hong Kong port business, which comprised 45.14 per cent, or HK$5.59 million of its total revenues in FY14, and a soft tariff outlook for both its Hong Kong and China ports.

HPH Trust currently owns port assets in Hong Kong's Kwai Tsing Port and the Yantian International Container Terminals in China's Shenzhen Port. From FY12-14, revenue from Hong Kong fell 6.9 per cent to HK$5.59 million while revenue from China grew 8.78 per cent to HK$7.30 million.

In FY15 and FY16, tariff is expected to grow one per cent per annum for Hong Kong while remaining stagnant for Yantian, data from DBS Group Research suggests.

The trust's management has also guided for a lower distribution per unit of 33-36 Hong Kong cents for FY15, a 12-20 per cent year-on-year cut, in an attempt to bring payouts closer to actual operating cash flows, as further deferral of capital expenditure appears unlikely. The coalition of factors has thus triggered analysts to slash their FY15/16 earnings forecasts for the stock.

Volume growth trends are muted in Hong Kong due to global growth uncertainties and infrastructure constraints, and cost pressures have intensified in recent years, after a port workers' strike in early 2013, DBS analyst Suvro Sarkar said, cutting his FY15/16 earnings forecast by 5-9 per cent to reflect poorer earnings from the trust's Hong Kong operations.

Mr Sarkar also downgraded his recommendation for the stock from a "buy" to a "hold" while lowering his target price from US$0.78 to US$0.65.

For Macquarie Research analyst Somesh Kumar Agarwal, there are two negative trends causing a fall in Hong Kong's container throughput. For one thing, the length of berths at Hong Kong ports is typically 300 metres. But the length and size of containerships have migrated upwards since 2009. In his opinion, these large containerships thus affect the utilisation of the adjacent berths, leading to lower port utilisation.

Increasing shipping line alliances among ship operators are also increasing logistical complexities for the Hong Kong port operators, thus increasing down time, he said.

And despite an overall increase in throughput volumes, Mr Agarwal added that tariffs appear weak.

He cut his FY15/16 earnings forecast by 8-9 per cent and reduced his target price for HPH Trust to US$0.76, all while maintaining his call for the stock at "outperform".

"At 6-6.5 per cent FY15 dividend yield, HPH Trust remains one of the best dividend plays in our coverage universe," he said.

His recommendation is a stark contrast from that of Citi Research analyst Michael Beer's, who downgraded his recommendation for the trust from a "buy" to a "sell", while lowering his target price for the counter from US$0.75 to US$0.66.

Excluding the HK$19 billion impairment and the approximate HK$125 million gain from the 60 per cent disposal of Asia Container Terminals in March last year, the trust's core FY14 earnings fell 15 per cent year on year, 4.4 per cent below Mr Beer's estimate, triggering him to revise his FY15/16 earnings forecast downward by 5-6 per cent.

"Within the transportation space, we continue to prefer the regional airline and airport names and believe that a number of other attractive yield plays can be found in the Singapore market, without the cyclicality within the export sector," Mr Beer wrote in a statement on Monday.