We profiled and introduce SGX listed chinese toll road operator China Merchant Pacific (CMHP) recently stating that this could become a good dividend income stock. [Analysis >>]
This week its Q3 2011 report was out. Specifically, they had a major acquisition and so we have speculated that it can pay out a good 8-9% dividend income annually on a 50-60% net profit payout.
[SGX Q3 2011 Results >>]
CMHP pay out SGD 0.045 in 2011 and at current share price of SGD 0.60 that works out to a 7.5% yield. The guidance for 2012 onwards is to pay out SGD 0.055 which comes up to a 9.1% yield on 50-60% payout.
Profit Composition Analysis
We have the maiden contribution from Yongtaiwen expressway (51% owned by CMHP)
In an additional information summary, CMHP showed the figures for its underlying assets.
- Traffic was up for all 4 toll roads QOQ and YOY.
- The greatest traffic growth being Guihuang and Yuyao.
Here is the profit contribution break down by toll roads
- Yuyao although there are traffic growth but profit was down 15% due to higher direct expenses.
- You can see how important Guihuang was to CMHP as it is this toll road that provides the biggest profit contribution. It should be noted that currently CMHP receives 100% of Guihuang’s profit contribution which will revert to its 60% share of the joint entity in 2014. We want to see this continue to grow as after 2014 we should see profit of Guihuang go down by 40%.
- The maiden contribution from Yongtaiwen was inline and gives CMHP a huge income boost. Yongtaiwen have thus become CMHP’s most important profit contributor.
- 2010 profits was boosted by the disposal of Luomei expressway to the tune of HKD 40 mil. Without this, this years result will see a more significant improvement from 2010.
Question: How much have Guiliu and Guihuang grown since 2004? What is the expected growth rate of Yongtaiwen?
The thing about toll roads is that they grow as the population, affluence and trade between inter joining places increase. We have seen substantial growth in both Guiliu and Guihuang.
The annualized growth rate for Guiliu and Guihuang’s traffic since 2004 was 7%. Do I expect it to continue growing? It depends. There is only this much traffic the roads will be able to take and at some point growth has to taper off.
But the surprising thing is that Guihuang is on track to grow massively this year on estimation from 3 quarters.
In comparison, Yongtaiwen’s traffic does not seem to change much since 2010. I suspect CMHP bought into a very mature toll road that have already grown quite a fair bit.
Question: How will full year 2011 profit contribution from toll roads look?
We use a 7% annualized growth rate for both Guiliu and Guihuang and a conservative 2% annualized growth rate for Yongtaiwen.
Since Yongtaiwen will only contribute 2 quarters, the estimated total profit contribution for 2011 will be 94+175+146 + 22 (Yuyao not on table above) = 437 mil
Question: How will full year 2012 profit contribution from toll roads look?
With a full year of contribution from Yongtaiwen with the same annualized growth rate, the estimated total profit contribution will be 100 + 187 + 297 + 20 (Yuyao not on table above) = 604 mil
Question: How will full year 2015 profit contribution from toll roads look?
In 2015, Guihuang will contribute 60% instead of 100%. We do expect that perhaps, Yuyao will be sold. There could be further acquisitions to augment the earnings.
But lets assume Yuyao is still around but declining at 10% per year.
The total profit contribution from toll roads will be 122 + 137 + 315 + 14 = 588 mil
The current outstanding number of shares is 718 mil. CMHP additionally have 135 mil redeemable convertible preference shares (RCPS).
Should these be converted it may mean a possible 19% share dilution. How this will impact current share holders is that current share of earnings and dividends will be diluted.
CMHP is likely to convert in the future should they need to free up cash to make further acquisitions.
The total enlarged (diluted) number of shares is therefore 854 mil.
CMHP was previously unleveraged, but with the purchase of Yongtaiwen they will be taking on HKD 1.4 bil in debt.
I enquired and got wind that the likely interest rate for the debt will be around 3%-4%.
This will work out to an annual interest expense of 1400 * 0.04 = 56 mil per year.
In the past CMHP have paid out 4 amounts of dividends, SGD 0.04, 0.045, 0.05, 0.055. The guidance is SGD 0.055 for next year.
Based on existing number of shares of 718 mil, to pay out these dividends, CMPacific will need at least
- 0.04: 176 mil (current yield based on SGD 0.60): 6.66%
- 0.045: 198 mil (7.5%)
- 0.05: 220 mil (8.3%)
- 0.055: 242 mil (9.1%)
Should we estimate based on dilution, where all RCPS be converted, CMHP will need at least
- 0.04: 209 mil
- 0.045: 235 mil
- 0.05: 261 mil
- 0.055: 287 mil
All other things being equal, we are concern about 3 different profitability period, FY2011, FY2012 and FY2015.
Taking our previous profit from toll roads contribution above deducting interest expense from debt servicing
- FY2011: 437 – 56 = 381 mil
- FY2012: 604 – 56 = 548 mil
- FY2015: 588 – 56 = 532 mil
Safe to say whether it is diluted or not diluted, CMHP will be able to pay out any of those dividends. The question is how much will be paid out.
We know that CMHP do not pay out 100% as dividends. I am supportive of this policy if
- Cash is used to make accretive acquisition
- Cash is used to pay down debt
- Capital Replacement. Do note that toll roads have a concession and are thus self-liquidating assets so you have to build up capital to buy more toll roads or renew existing toll roads
- Based on undiluted number of shares (718 mil), the earnings yield is
- FY2011: 381 mil / (718 * 0.60 * 6.13) = 14%
- FY2012: 548 mil / (718 * 0.60 * 6.13) = 20%
- FY2015: 532 mil / (718 * 0.60 * 6.13) = 20%
Diluted number of shares (854 mil), should CMHP convert the shares tomorrow at SGD0.60, the earnings yield is
- FY2011: 381 mil / (854 * 0.60 * 6.13) = 12%
- FY2012: 548 mil / (854 * 0.60 * 6.13) = 17.4%
- FY2015: 532 mil / (854 * 0.60 * 6.13) = 16.9%
- If we estimate that CMHP pays out 55% of their earnings and keep 45% as retained earnings, CMHP will be able to pay out
- FY2011: 381 mil * 55% = 209 mil
- FY2012: 548 mil * 55% = 301 mil
- FY2015: 532 mil * 55% = 292 mil
We can conclude that all assumptions taken into consideration, CMHP can probably cover
- FY2011: undiluted dividend of SGD 0.045 and diluted dividend of SGD 0.04
- FY2012: undiluted dividend of SGD 0.055 and diluted dividend of SGD 0.055
- FY2015: undiluted dividend of SGD 0.055 and diluted dividend of SGD 0.055
That works out to a pretty good 7.5% yield for FY2011 and anywhere between a 9.1% yield for FY2012 and FY2015 should you buy it now at SGD 0.60.As usual the devil is in the detail. The assumptions are:
- Guiliu and Guihuang no impairment. Annualized growth rate at 7%
- Yongtaiwen no impairment. Annualized growth rate at 2%
- Yuyao not sold. Annualized growth rate at –10%
- No acquistions
Servicing the HKD 1.4 bil of debt
Some how or rather, the debts on the balance sheet will need to be cleared.
Assuming FY2012 CMHP retained 45% of profits, CMHP will be able to use 246 mil to clear its debt.
That would mean they can clear the debt in 5.6 years.
Alternatively, should share price trade above NAV, they can choose to do a rights issue to convert the debt to equity.
Debt on underlying toll roads
A worry from my past experience with MIIF is that the underlying assets are heavily funded by debt and could be a problem during periods where refinance is an issue.
For CMHP, only the recent acquisition have debts. The other 3 do not. The current profile is that Yongtaiwen have 500 mil in cash and 1.7 bil in interest bearing debt.
Based on the interest expense, we estimate the interest rate to be around 5.8%
Since there is depreciation accounted under Yongtaiwen, it is safe to say that this depreciation can be used to pay down the debts.
The profit we compute should be net of this depreciation and based on the third quarter reported Amortization of intangible assets, this amounts to a full year depreciation of possibly 62 mil * 4 = 248 mil.
To clear the net debt of 1.2 bil, Yongtaiwen could probably take 4.8 years to clear it.
All in all we are pretty satisfied with this results. I wouldn’t say this is a solid yield stock but toll roads are pretty defensive. It is even better if its not very levered and we can see the underlying assets have the ability to pay down debts.
A 55% payout is good for a company with many self-liquidating assets. It allows for rejuvenation provided the 45% retained is put into good use.
The caveat is always the growth or impairment of the underlying assets. We have to be aware that like all infrastructures there run the risk of major natural disaster catastrophe.
This asset in the long run I am expecting it to yield like First REIT which is around the 8% to 9% region. It has the same geographical risks yet with a defensiveness during recession.
Currently invested with a small position, but I was hoping to collect it cheaper but it didn’t even drop back to the SGD 0.46 level. I have a feeling that it will trend back to NAV of SGD 0.80.
The future growth comes with more acquisition and the caveat is to monitor to see if the assets are quality and not an asset dumping exercise from parent CMH.
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