HPH Trust: Asset Backed Yield (Now within proper range) (DMG)

(BUY, S$0.62, TP S$0.75)

We initiate coverage on HPH Trust with a BUY rating and TP of US$0.75. Our TP is based on DCF on distributable income using 8.34% WACC. We like HPH Trust given: (1) the three deep-water container ports under its portfolio are strategically located in the Pearl Delta River (PRD) with dominant market share; (2) Sell-down in shares has more than reflected the slowdown in throughput volumes. We think FY12F yield at 9.0% is attractive.

Market leader in the PRD. HPH Trust’s major assets are Hongkong International Terminals (HIT) (100%), COSCO-HIT (50%) and Yantian Ports (51.6-56.4%). The three ports have dominant positions in Hong Kong and Shenzhen. Collectively, the ports accounted for 38% of container throughput volume in the PRD in 2010. HPH Trust also has the support from its sponsor, Hutchison Port Holdings (HPH). HPH is the world’s largest container port operator and owns 27.6% of HPH Trust.

Forecast payout higher than most Singapore listed REITs. HPH Trust has committed to pay out 100% of its distributable income. We forecast FY11F (annualised) and F12F DPU of US5.34¢ and US5.57¢ respectively. At current share price, HPH Trust offers 8.6% and 9.0% dividend yield for FY11F (annualised) and FY12F respectively. The yield is higher than the average yield for Singapore listed REITs and business trusts.

Valuation: DCF-derived TP implies 7% yield and 13.7x adjusted FY11F P/E. From a P/E perspective, current share price looks expensive at 20.8x FY11F P/E vs. other listed Chinese ports at 7-10x but this is due to higher depreciation charges following the transfer of assets into the trust at fair value. Adjusted FY11F P/E of 11.4x (based on current price) implies a slight premium to peers (144 HK and 1199 HK). We think the premium is justified given the ports have dominant market position in the PRD.

Key risks: (1) Strong dip in container volumes below our forecasts; (2) rising competition from neighbouring ports which could put pressure on pricing; (3) forex risk; (4) unable to channel dividends from subsidiaries up to the Trust level.