HPH Trust US$

ON MAR 7,  Hutchison Port Holdings Trust  (HPH Trust), the container port operator and owner, announced it acquired Asia Container Terminals Holdings (ACT Holdings) from DP World and PSA China, for a total cash consideration of HK$3.917 billion ($630 million), paid for with debt. ACT Holdings was 55%-owned by DP World 45% by PSA International (Port of Singapore). DP World also disposed of its stakes in other Hong Kong port assets to Goodman Hong Kong Logistics, an unlisted Hong Kong REIT.

ACT Holdings owns and operates Container Terminal 8 West, located at Kwai Chung, Hong Kong, which is next to the HPH Trust’s existing container terminals. “The rationale for the acquisition resides with the price and the potential synergies as back office expenses and sales forces are merged, rather than the rate of Container Terminal 8’s throughput growth, which has declined for the last two years,” says Credit Suisse in a note on the acquisition.

To be sure, Container Terminal 8’s (West) TEU saw through put of just 1 million TEU in 2012, down from 1.2 million TEU in 2011. In contrast HPH Trust handled 11 million TEUs in Hong Kong last year. However, Container Terminal 8 is adjacent to HPH Trust's existing operations at Cosco-Hong Kong International Terminal (HIT) 8 (East). Hence, it makes good strategic sense to combine the two. The acquisition will expand HPHT’s Hong Kong presence to 16 berths from 14, previously. Hong Kong has 24 total berths, giving HPH Trust increasing market power, says DBS Vickers in a recent note.

“Given that HPH Trust's joint venture Cosco-HIT terminal in Hong Kong is next to Container Terminal 8, and ACT also handles overflow containers from HPH Trust, this acquisition should also provide synergistic benefits to both revenue and costs, and hence the bottom-line of the operations,” the DBS Vickers report says.

Based on the financials though, the acquisition looks a tad expensive. HPH Trust paid US$407 per TEU based on 2012 container volume for ACT. By comparison HPH Trust’s own current enterprise value translates into a price of US$680 per TEU. Barclays in an update on HPH Trust estimates that the trust is paying between 7 times and 9 times operating profit. “We estimate that the acquisition would represent about 5-6% of 2013 volumes based on HPH Trust equity share. However, given the transshipment nature of the asset, revenue and profit contribution will likely be slightly less than 5%,” Barclays says.

In addition, ACT’s NTA as of 31 Dec 2012 was HK$625 million ($101 million). “This implies a 5 times multiple of the acquisition price over NTA and looks demanding at first glance,” notes a Maybank Kim Eng report. HPH Trust’s net debt to equity would increase 0.4 times from 0.3 times too.

Yet, because the acquisition is debt funded, with a blended cost of debt around 2%, DBS Vickers reckons buying ACT could raise DPU by up to 5% in a full year, including synergistic benefits, since ACT's utilisation rate is less than 60% currently.



Maybank Kim Eng, however, views the transaction positively from a different aspect. “We prefer looking at the ACT acquisition from a discounted cashflow point of view. Free cashflow is the pivotal metric to the investment thesis of HPH Trust being a strong yield play. For this, we take comfort from HPHT’s expectations of DPU accretion from this deal,” the report states. Maybank retains its buy recommendation on the stock with a target of 93 cents.