HPH Trust – BT

Have a little faith in HPH Trust

THE thing about businesses that bill themselves as cash cows is that cows are plodding creatures. In good times, this was not a problem for Hutchison Port Holdings (HPH) Trust.

All it had to do then was be the yawning maw at the gateways of Hong Kong and China, sucking in port fees from the deluge of cargo passing through its jaws. But times are lean now, and in lean times, global trade is part of the fat that falls away first. Since HPH Trust was listed in March this year, the business trust has fallen about 36 per cent from its listing price, closing at 65 cents yesterday.

It would be tempting to offer, ‘It’s the economy, stupid’ as an explanation, but China Merchants Holdings and Cosco Pacific – two of HPH Trust’s competitors – lost only 30 per cent and 29 per cent of their value in the same period.

While a significant part of the selldown had been industry-related, investors are – for reasons that are not entirely clear – taking a more narrow view of HPH Trust, relative to its competing port operators.

To be sure, there are some causes for concern that have been well-visited over the past few months. The ports in the trust’s portfolio have seen the direct impact of slowing global trade, with revenue falling about 2.6 per cent short of the forecast figure for the period ended June 30, 2011 – even as it grew year on year.

The distribution that is denominated in Hong Kong dollars remained a bugbear, as the US dollar – to which the HK dollar is pegged – continued on its merry way southwards.

Even so, HPH Trust’s unit price has come down, making another bugbear more of an advantage – its distribution yield. When it was first listed, the yield was knocking about in the 5-6 per cent range.

It was consequently sniffed at, since real estate investment trusts offered comparable – and even higher – rates. Shipping trusts, as well, offered rates in the region of about 12-13 per cent.

Now, however, at 65 cents, the trust’s yield – estimated at about 5.9 US cents for a full year – is about 9.1 per cent. This far outstrips the average yield offered by Reits in the 5-7 per cent neighbourhood. You could compare it to the shipping trusts that offer two-digit yield percentages, but analysts will wearily tell you that the comparison is unfair.

Shipping trusts have ships that are depreciating assets, while ports sit on land that appreciate over time if no one does anything silly.

The higher yield that investors get from shipping trusts is also something of a stress premium, given the myriad uncertainties that exist in the form of refinancing and counterparty risks.

There is the question, however, of whether HPH Trust will keep up its promise of paying out 100 per cent of distributable income or if distributable income will shrink, especially if trade worsens.

In pricing in this eventuality, however, the market appears to have crossed the line by so much that the line is now a dot, according to some analysts’ estimates.

Volume, while not expected to grow at the 7-8 per cent clip previously expected, will probably still grow at a lower rate.

‘Current valuations seem to be implying negative trade growth and negative Ebitda growth of almost 20 per cent in FY2012, which we don’t think is a realistic possibility even if the world goes into similar levels of recession as in 2008-09,’ said DBS Group Research analysts Suvro Sarkar and Paul Yong in a report last month, when the stock hit 67.5 US cents.

They have a ‘buy’ rating on the stock with a target price of US$1.05.

HPH Trust does look rather dear, relative to its rivals – Hong Kong-listed Cosco Pacific and China Merchants Holdings. While HPH Trust trades at a price-to-earnings (PE) ratio of the high teens, Cosco Pacific and China Merchants have PE ratios in the high single-digits.

This disparity in PE ratios, however, is balanced out by the edge that HPH Trust holds in terms of dividend yield – 9.1 per cent at its current price, compared to 4.55 per cent and 4.5 per cent for China Merchants and Cosco Pacific, respectively.

At this price, HPH Trust is a relatively superior dividend play and when trade turns around, potentially a capital gains one as well.

The call that the investor will have to make, however, is how much a depreciation in the US dollar would erode the gain in dividend. By the time the greenback loses enough value to eat through a dividend yield of 9 per cent, perhaps an investment in HPH Trust will be the least of one’s worries.