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10-03-2011, 02:35 PM
Just to share some quick thoughts on the HPH Trust IPO:
+ PSA and Hutchison Whampoa Ltd (HWL) are the previous owners, both of whom can be considered world-class port operators.
+ Good assets: total port business portfolio returned 11.8% on its total assets in 2010. However, post-IPO, this will drop to about 2.4%, mainly because of an big increase in goodwill. Furthermore, ROE is only about 3%. High net margins of about 25 - 30%.
+ Assets are include some of the busiest terminals in HK, in the Kwai Tsing Container Terminals, which for years, has been Singapore's main rival. Now it's ranked 3rd in the world behind Singapore and Shanghai in throughput volume.
+ Aggregate interest rates on its loans are at 1.2% + LIBOR, implying good status among creditors. With the high margins, and an interest coverage of 6.3 times, slight increases in interest rate should not hurt profits too much.
+ Temasek Holdings and Paulson & Co. (of John Paulson fame, who famously shorted the banks pre-2007, went long on them in the depths of 2009, and also rode the gold rush last year) are cornerstone investors.
- They have a strange way of calculating distributable income, which is = net income / seasonality factor. No details on how seasonality factor is calculated. Sans seasonality factor, pro forma distributable income (i.e. the net profits for 2011) is only US$0.049, a 4.5% yield over the maximum IPO price. This implies roughly a P/E of 21.5 times. HWL, the parent is currently trading at 23 times on the SEHK.
- 99% of the proceeds will be used to buy over the port business portfolio, essentially providing an exit for HWL. An astute businessman like Li Ka Shing is unlikely to sell one of its prized assets at a good discount. Assuming the maximum price (US$1.08) received for the IPO units, approximately HK$93 bn will be received. Of this amount, about HK$ 47 bn will be used to purchase HWL's share of the portfolio assets, while the remaining HK$46 bn will be recorded as goodwill. Only 1% of the IPO proceeds will be used to pay off creditors.
- The trust has stated its policy to distribute 100% of distributable income. Distributable income can come from operating cash flow even if net profits after tax is negative. This hints at the same problems that REITs have; they have no reinvested income for growth. Additional growth will require additional capital raising. The new entity after IPO will have 50% equity and 50% liabilities. Thus, there does not seem to be much room for growth without equity-dilutive fund-raising
- The Trust Manager is a wholly-owned subsidiary of HWL. Their remuneration comes in 4 forms:
a. They will earn a base fee of US$2.5mn a year. This will increase with HK CPI, and is subject to upward adjustments if there are major additions to the portfolio. There is no mention of downward adjustments.
b. There will be a performance fee. Basically, unless they can increase their projected distributable income by 16%, they will still earn more from their base fee than their performance fee. There are no clawbacks, but underperformance will be carried forward till it is earned back.
c. They will earn acquisition fees of between 0.5% - 1% of the enterprise value of future acquisitions.
d. Finally, they will earn 1.5% - 2.5% of future development project costs as development fees.
- There is no lock-up period for the cornerstone investors. The sponsor (HWL) has a lock-up period of only six months.
- Investment mandate can be changed after 3 years, meaning HPH Trust may be allowed to acquire non-port businesses.
- Trust manager can only be removed by the approval of more than 75% of unitholders.
- For FY 2010, "costs of services rendered" was HK$3.7 bn while "net profits" were HK$3.3 bn.
In general, it seems like a case of good, stable business, but not-so-good price. As with most trusts, it also seems better to manage the trust than to own it.
+ PSA and Hutchison Whampoa Ltd (HWL) are the previous owners, both of whom can be considered world-class port operators.
+ Good assets: total port business portfolio returned 11.8% on its total assets in 2010. However, post-IPO, this will drop to about 2.4%, mainly because of an big increase in goodwill. Furthermore, ROE is only about 3%. High net margins of about 25 - 30%.
+ Assets are include some of the busiest terminals in HK, in the Kwai Tsing Container Terminals, which for years, has been Singapore's main rival. Now it's ranked 3rd in the world behind Singapore and Shanghai in throughput volume.
+ Aggregate interest rates on its loans are at 1.2% + LIBOR, implying good status among creditors. With the high margins, and an interest coverage of 6.3 times, slight increases in interest rate should not hurt profits too much.
+ Temasek Holdings and Paulson & Co. (of John Paulson fame, who famously shorted the banks pre-2007, went long on them in the depths of 2009, and also rode the gold rush last year) are cornerstone investors.
- They have a strange way of calculating distributable income, which is = net income / seasonality factor. No details on how seasonality factor is calculated. Sans seasonality factor, pro forma distributable income (i.e. the net profits for 2011) is only US$0.049, a 4.5% yield over the maximum IPO price. This implies roughly a P/E of 21.5 times. HWL, the parent is currently trading at 23 times on the SEHK.
- 99% of the proceeds will be used to buy over the port business portfolio, essentially providing an exit for HWL. An astute businessman like Li Ka Shing is unlikely to sell one of its prized assets at a good discount. Assuming the maximum price (US$1.08) received for the IPO units, approximately HK$93 bn will be received. Of this amount, about HK$ 47 bn will be used to purchase HWL's share of the portfolio assets, while the remaining HK$46 bn will be recorded as goodwill. Only 1% of the IPO proceeds will be used to pay off creditors.
- The trust has stated its policy to distribute 100% of distributable income. Distributable income can come from operating cash flow even if net profits after tax is negative. This hints at the same problems that REITs have; they have no reinvested income for growth. Additional growth will require additional capital raising. The new entity after IPO will have 50% equity and 50% liabilities. Thus, there does not seem to be much room for growth without equity-dilutive fund-raising
- The Trust Manager is a wholly-owned subsidiary of HWL. Their remuneration comes in 4 forms:
a. They will earn a base fee of US$2.5mn a year. This will increase with HK CPI, and is subject to upward adjustments if there are major additions to the portfolio. There is no mention of downward adjustments.
b. There will be a performance fee. Basically, unless they can increase their projected distributable income by 16%, they will still earn more from their base fee than their performance fee. There are no clawbacks, but underperformance will be carried forward till it is earned back.
c. They will earn acquisition fees of between 0.5% - 1% of the enterprise value of future acquisitions.
d. Finally, they will earn 1.5% - 2.5% of future development project costs as development fees.
- There is no lock-up period for the cornerstone investors. The sponsor (HWL) has a lock-up period of only six months.
- Investment mandate can be changed after 3 years, meaning HPH Trust may be allowed to acquire non-port businesses.
- Trust manager can only be removed by the approval of more than 75% of unitholders.
- For FY 2010, "costs of services rendered" was HK$3.7 bn while "net profits" were HK$3.3 bn.
In general, it seems like a case of good, stable business, but not-so-good price. As with most trusts, it also seems better to manage the trust than to own it.