Sunday, September 18, 2016

My buying price for Hutchison Port Holdings Trust

I have eyed Hutchison Port Holdings Trust for many years.  It is a business trust holding the container ports in Hong Kong and Shenzhen.

The earning model is rather simple.   The core business of a container port is to get the imported goods unloaded from a ship, and then load goods that are meant for export.

When the economy is good, and there are more goods coming and going, then the container ports will make a good profit.

The weak global economy means lesser import and lesser export, and that means lesser earnings for Hutchinson Port Holdings Trust.

The first time I considered buying Hutchison Port Holdings Trust was about two years ago.

The only thing that stopped me was their capital expenditure announcement.

The 3 years capital expenditure for building deep sea berths in Yantai means less money for the investors.  Since Hutchinson Port Holdings Trust is a dividend play, cash is king.

Most cash towards expansion means less cash for the shareholders.

That was the time when I decided to wait till the capital expenditure program ended.

However, Hutchinson Port Holdings Trust announced earlier this year that it will pay down its debt from 2017.

The debt repayment plan means that it will repay HK$1bn every year from 2017.

In the long term, the capital expenditure and debt repayment are good for the investors, since that will lead to potentially higher earnings, and lower expenses (in term of interest paid to the banks).

However, in the short term, that means less cash to give out to the investors.

I still like Hutchinson Port Holdings Trust, so now I have to take all the available information, and compute my buying price.

I assume that the earnings for the next few years will be just as bad, since the global economy is not likely to improve so much that the earnings will skyrocket.

I assume that the economy is not going to worsen much too.  Since US is recovering, the rest of the world is not likely to get into a deep recession.

The dividend paid for the period Jan 16 to Jun 16 is HK 14 cents.  The amount paid to all investors is HK$1,219.6 million.

The dividend paid for the period July 15 to Dec 15 is HK 18.7 cents.  The amount paid out is HK$1,629 million.

I will take the full 12 months as a basis.   Out of the earnings from July 15 to Jun 16, a total of HK2,848.6 million is paid out as dividend, and each share gets a dividend of HK 32.7 cents.

I assume conservatively that in 2017, a billion HK dollar is used to repay the debt and the amount remains for investors is HK1,848.6 million.

That means dividend per share is just HK 21 cents.

At the current exchange rate of HK 1 dollar converts to S$0.177, the dividend in Singapore currency is just S$0.037.

I usually expect a 5% dividend yield, so based on the expected dividend of S$0.037, my buying price is S$0.74.

However, in this case, I will have to add in a margin of safety to account for the exchange rate risk, and the risk of another labor strike.

I will only buy when the dividend yield is 7%.  That brings my buying price to S$0.52.

The current share price in Singapore currency is S$0.595.

I doubt I will to wait very long.  Hutchinson Port Holdings Trust has proven to be a falling knife since its IPO. 

Even though it is part of the STI components, and those who invest in STI ETF will have shares in it, I do not think the share price will increase.

It will probably fall all the way to 50 cents within a year.

The only certainty is that the share price will not reach 0.  No matter how bad the business is, the port is still making money, and the economy of Hong Kong and Shenzhen cannot do without the ports.

I will have to think about the selling price before I buy the shares.

This part is harder since the share price is unlikely to see an increase within 2 years.   I doubt I will see a huge capital gain even if I hold for 5 years. 

Hutchinson Port Holdings Trust will be a pure dividend play for me, if and when I manage to get it below 52 cents (Singapore currency).

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