Hutchison Port Holdings Trust - DPU in line; deep value at these levels (DBSVickers)

BUY US$0.735

Price Target : US$ 1.05 (Prev US$ 1.15)

At a Glance

• DPU of 14.3HKcts (1.84UScts) for first period in FY11 in line with our estimates and above IPO guidance

• Lower-than-expected revenues offset by lower operating and interest expenses

• FY11 DPU estimate unchanged; Lower FY12 DPU by 3% to reflect economic concerns

• Maintain BUY; TP adjusted lower to US$1.05

Comment on Results

No surprises in DPU. Revenues of HK$3400m for the 3-and-half month period (16 Mar to 30 Jun 2011) was lower than expected on account of disappointing throughput growth at both ports, but net profit and distributable cash was boosted by cost and interest savings. Staff costs and Trust expenses were well contained, and depreciation and amortisation were also lower than expected, though these were offset by higher tax recognition (deferred tax credits). Interest costs came in significantly below estimates as floating interest rates remained much lower than our conservative assumptions. Income from associates and JVs was boosted by better performance at COSCO-HIT, where throughput growth outperformed assumptions.

Recommendation

Slightly lower growth trajectory but combination of yield and growth still attractive. For the period under consideration, throughput growth disappointed, with HIT and Yantian Port registering 4.6% and 2.1% y-o-y growth, respectively, lower than our 6-8% initial estimates. And there is no evidence of a strong peak season as yet, owing to economic uncertainties in the US and EU. As our economist cuts US GDP growth to 1.6% in 2011 and 2.5% in 2012, we revised down our volume growth assumptions in FY11/12 to 4-5%. However, ASP trends remain intact and since cost savings will largely offset volume weakness in FY11. We keep our 2H11 DPU estimate of 2.9UScts unchanged but cut our FY12 DPU estimate by 3% to 6.4UScts. Maintain BUY with revised DCF-based TP of US$1.05 (lower DPU CAGR of 7% over FY11-15). Management re-iterated their commitment to pay out 100% of distributable income. Current valuations – ~8% dividend yield is even higher than what some infrastructure and shipping trusts are trading at – look unjustifiably low given HPH Trust’s superior asset profile, earnings quality, balance sheet strength and organic growth potential.