Wednesday, February 12, 2014

HPHT - My tainted view of FY results

Market has given HPHT the thumb down for it Q4/full year results.

NPAT and NPAT attributable to unitholders for the 4th quarter was 34% and 47% lower than last year. It seems like operations are deteriorating. First some number crunching.

1) OCF is 5.1 billion HKD compared to 4.4 billion a year ago. Q4 OCF is 1.4 billion.

2) Yantian did show better throughput of about 1% but is offset by the 12% decline in HIT ports.

3)   There were several one-off items, below are the items and the amount

a) Expenses incurred for acquisition of ACT; est. 110 million HKD

b) Additional interest expense due to refinancing of loans; est 7 million

c) One-off concession to liners due to the disruption of HIT ports due to strikes; preliminary calculation - 600K

d) Currency loss/gain- I would not classify it as one-off

4) recurring higher costs

-> Worker fees hike ->Full year impact to be felt, est. 230 mio (refer to previous blogpost for its calculation)

-> expiring of Yantian tax credit, assuming 10% growth in Yantian profits and resultant in total tax increase = 200 million

Assuming operations stay status quote, the one-off costs are insignificant and not enough to offset higher costs from tax expiry and higher workers' pay.

Yet, against all the odds of a lower distribution than projected, this is the third year HPHT has meet its distribution target. It did mainly by postponing Capex and management of working capital.

The management of working capital is especially amazing, given that cost of service, and various expenses all increase in Q4, it still managed a OCF of 1.4 billion, compared to OCF of 1.2 billion in 2012Q4.

Management has expect throughput to improve, which is likely if trade rebounds and HIT recover from post-strikes problems.

The question is how much must OCF improve in 2014, so that the 40 cents distribution can be put on solid sustainable footing, without postponing capex  (management guide CAPEX as 1.5 billion to 2 billion ), or drawing down more loans?

Answer: about 30% (Assuming Capex of 2 billion and dividends to minority interest of 1.8 billion, OCF need to be 7.2 billion)

IS that an tall order? You bet!

Will 2014 distribution be cut? Unlikely, HPHT has not missed projected target of distribution for 3 years in a row, they will most probably resort to further postponement of capex and use cash or loans to deliver the shortfall. Net gearing is about 50%. If we use 10% growth is OCF and a more reasonable capex of 700 million, there is no need to drawn down loans at all.

What is then a sustainable distribution going forward? 31 HKD cents. A FCF of 2.73 billion after capex and MI,at current price, it means a 5.4% yield after 2014 is reasonably achievable and sustainable.

In conclusion, do I think HPHT is still an attractive investment?

My average price for HPHT is 81 cents, there would give me an 8% yield for this year and the next. I do not think I have a high risk of capital loss if I hold it, but the returns will suck if the rebound in trade do not surprise on the upside. 

I have better alternative. I will look to take profits in strength, but will not be in a rush to sell.

 

 

 

2 comments:

  1. Hi Mike,

    We are talking about your blog post on HPH Trust on my FB wall! Good stuff! :D

    The income distribution, as you have said, is at the level it is because the Trust is not operating as it normally would. If it did not postpone CAPEX or jiggle working capital, it would not have delivered on distributions.

    Hope is now on possibly improving volumes in the next 12 months on the back of expected economic recovery in USA and Europe. Will this happen and if it does, will it be enough to allow the Trust to operate normally again (i.e. with normal CAPEX). This is an unknown which is, of course, a risk.

    For a Trust with a big chunk of its assets with land leases expiring just 33 years from now, I would really need a much higher distribution yield to be interested. Some people would say that an 8% yield is effectively only 5% if we take land leases into consideration.

    Then, add to the fact that gearing level is 50% which, in effect, doubles the yield, the investment becomes even less attractive. If we accept that, effectively, yield is only 5%, then, unleveraged yield is only 2.5% over the useful life of the assets as I would think that loans have to be repaid at some point.

    I fear that the competition from Chinese ports will only intensify in time to come and that the business could face more headwinds.

    HPH Trust has to offer a much higher yield than 8% which I think is already quite a challenge before it is a reasonably good investment for income.

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  2. Hi AK,

    You are right, it is not an attractive investment. But for those who already "up the pirate ship", rushing to sell at a loss might be too panicky too. Of course, it varies from
    People to people too, if someone is sure of making 50% return with an alternative, I think it is still ok to sell.

    I would like some pocket money before i sell.. Hehehe ... It is already at low price and market is improving.

    Glad they talk about their purchases with u, on hindsight, the investment wasn't really attractive. I believe I bought a lemon? Or old white elephant ...

    But it is also possible that the trade numbers do get better and they do not have to do so much financial engineering.

    I must go see your Facebook, in case someone spit at me... Muhaha

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