Hutchison Port Holdings Trust (HPHT) have been in a downtrend since its IPO days.
Investors like myself were attracted to the dividend yield. Its net asset to debt is comparatively lower than the REITs, so its in a good situation there.
Unfortunately, unlike a lot of the REITs the results in these transhipment ports have been very challenging.
HPHT just announced their latest first quarter 2018 results and net profit is down by 12.9%.
That isn’t surprising.
What we find interesting would be the slight change in narrative in the commentary.
If we start reading from 1st quarter 2017 commentary:
then 2nd quarter 2017:
then 3rd quarter 2017:
then this 1st quarter 2018:
The narrative seems to be a cut and copy for the first 3 quarter. For the upcoming first quarter there is a shift in tune. It gives the idea that perhaps management think they are not out of the woods but things will get better.
The purpose for doing this is to identify the potential change in the profit and cash flow trends. If there is a change in trends, the cash flow rises, the share price may follow suit.
How Comfortable of a Dividend can HPHT Pay Out?
Let’s try to see if we can figure this out.
HPHT just announced their 1st quarter results. While net profit is down, the operating cash flow looks pretty stable.
OCBC research have a pretty good chart showing quarter by quarter key results.
If we try to annualize the first quarter 2018 results and use that predict whether the dividend is sustainable or not, we will be fxxked.
Given this, I am more incline to compare HPHT full year 2017 cash flow, and do some forward modifications to this.
PS: Cash flows for the beginners might be a wild jungle. I written an article explaining the different type of cash flow and why we need so many different ones. You can read Net Profit, EBITDA, Operating Cash Flow and Free Cash Flow in Dividend Investing here.
Some things to note:
- Management have said 2 years ago they plan to reduce their debt. So they will spend a minimum of HK$1 bil each year to reduce the debt. This will reduce the cash flow
- HPHT needs to pay non-controlling shareholders of their partial owned assets dividends. So those are cash flow that should be taken out
- Since HPHT has debts, they have to pay interest on it
- As with most operating business, HPHT needs to pay capital expenditure as well
The following is HPHT 2017 full year cash flow statement:
Calculating the Investors Cash Flow depends on your objective, which drives what you factor into your calculation.
In this case we are looking at HPHT’s ability to pay the dividend.
For me the cash flow that I am looking at is:
- + cash generated from operations
- – interest and other finance cost paid
- – tax paid
- – purchase of fixed assets (#1, this is the capital expenditure)
- – 1 bil in planned debt repayment (#4)
- – dividends to non-controlling interest
- + dividends from investments, associates and interest income received (#3)
We do noticed that in 2017, the capital expenditure is much lower (#1). HPHT did spend a fair bit of money to purchase an increased stake in HICT (#2 and the foot notes).
DBS research seem to estimate that future capital expenditure will be around $1 bil.
So what we can do is to estimate the cash flow with both $1 bil and $1.7 bil.
We want to see a possible dividend yield and a conservative one.
With FY2017 figures, the investor cash flow will be = 7.1 bil – 0.75 bil – 0.645 bil – 1 bil – 1bil – 1 bil + 0.22 bil = HK$2.9 bil.
HPHT Market Capitalization (Current share price x number of outstanding shares) is US$2.87 bil. In HKD this is HK$22.53 bil.
Thus the cash flow yield that HPHT can pay out is 2.9/22.53 = 12.87%.
That looks good.
Lets put in the conservative capex of $1.7 bil. The investor cash flow will be = 7.1 bil – 0.75 bil – 0.645 bil – 1.7 bil – 1bil – 1 bil + 0.22 bil = HK$2.2 bil.
The cash flow yield that HPHT can pay out is 2.2/22.53 = 9.7%.
Now instead of 2017 figures, lets use 2016 full year figures with a 1.7 bil capex.
The investor cash flow will be = 6.7 bil – 0.64 bil – 0.98 bil – 1.7 bil – 1bil – 1 bil + 0.14 bil = HK$1.52 bil.
The cash flow yield that HPHT can pay out is 1.52/22.53 = 6.7%.
Going through this exercise, we can see that a lot of the forward dividend depends on:
- the operating cash flow going forward. What drives this will be the net profit margins, the revenue in the future
- the capital expenditure guided. From what we reviewed of HPHT their capital expenditure can vary, depending on management’s decision and needs
- management’s capital management plans
This is why if we marry the commentary and the cash flow analysis there might be a potential there.
Of course if we use a lower operating cash flow with higher tax, as with full year 2016 figures, the cash flow yield is wildly different.
HPHT pays out HK$0.206 in the last year, which translates to a 7.8% dividend yield based on current share price (Apr 18 2018).
On my Dividend Stock Tracker, you can keep track of the change in dividend yield of HPHT, as well as other popular dividend stocks in Singapore.
However, if there is one thing this exercise teaches you, it is that don’t assume just because its listed as 7.8% that means a company like HPHT can pay it out the next year. HPHT have seen their cash flow dwindle over the years since IPO, which explains the fall in their share price.
A poorer operating cash flow, higher projected capital expenditure, would bring down the cash flow that HPHT can use to pay out that juicy dividend. If not enough, they cut your dividend. When your dividend is cut, the market thinks the future is worse off, so it sells off.
Its a negative feedback loop.
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