I'm selling HPH Trust (NS8U.SI)

Following HPH Trust's result announcement, I've finally decided to part ways with this stocks. In many posts here, here and notably here, I had voiced concerns about the sustainability of the dividends payout and the effect of China's slowdown. Unfortunately, due to procrastination and the time taken up by school work, I was unable to followup with a review of HPH Trust. On top of the 26% drop in underlying NPAT attributed to shareholders, this announcement also came with a very jarring note which stated it is:

"...repaying a minimum of HK$1 billion of debt annually beginning in 2017"

Dividend Issue

Woah, hold it right there. The amount is no small sum at all. Taking 2015's distribution amount which comes up to HK$2996.6 million or 34.40 HK cents per share, repaying HK$1 billion per year will cut this distribution amount to 22.92 HK cents or 33.3% drop!! Now, this is just purely assuming that the repayment solely comes from the hand dipping into the distribution income. Some might be taken from its existing cash pile...?

But take a look at Total Consolidated Cash at 31 March 2016: $5,995.6

It's not much at all. Keep in mind that HPH Trust need $1 billion per year for 5 years, not to mention servicing of short term debt. Another consideration is the dropping NPAT attributable to shareholders (no time to consolidate data, sorry!), which will eventually lead to decreased DPU. 2015's yield was exactly 8.0% based on my purchased price of US$0.68. Given that the first half of the dividend had already dropped 14%, the forecasted yield based on my purchase price is around 6.8% for this year. Conservatively taking out another 20% drop in DPU because of debt repayment, the dividend yield in 2017 will be just 5.5%!!. I had mentioned that my comfortable level was actually 6.5% and this violated my reason to buy/hold HPH Trust.

Will it fit into my portfolio?

5.5% is a decent dividend for any stocks and the fact that STI is one of the top dividend yield index in the region may just be because of HPH Trust! However, does it justify a place in my portfolio after all? I'll be using a concept I've learnt in my FIN3101 class (hello Prof Ruth!) - the Modern Portfolio Theory. 

I'm not going to explain in details about this concept, but in general it is about using diversification to bring the risk of a portfolio down to your acceptable level and get the best expected returns, through varying the weights of your portfolio components. 

To cut to the chase, I had actually found that by removing HPH Trust from my portfolio, the standard deviation or risk of the portfolio did not change and it was actually accompanied by a marked increased in expected mean return of the portfolio. This essentially signified that HPH Trust did not contribute to my portfolio in terms of risk and was actually detrimental in terms of expected returns. 

This was actually my first time using this method to analyze my portfolio and I was excited to find out about this fact! The photo below shows my calculation and any guru that may come by this humble blog can double check my workings. 

Seeing that future dividends are going to be cut and finding out that HPH Trust is useful in my portfolio, I have decided to sell this stock. Queued at US$0.465 all day to no avail, I will continue to try tomorrow or at least in the immediate term. 

My Stock Holdings (June)

June has been a busy period for me as I was busy packing stuff to go back to Singapore. It seemed that this month has been a volatile month due to the effect of Greece flirtation with the possibility of default.

ST Eng's price was pushed to a low of 3.24 before recovering recently to above 3.3, which is my average buy-in price. Many people in forums have expressed the opinions that ST Eng is richly valued in terms of P/E and P/B. I had see that the valuations are rich but dividend yield remains good. Given time, perhaps I'll see whether its dividend policy is sustainable and whether cash holdings is decreasing. 

Singpost also recovered its price dip to above 1.90. This can be attributed to annual dividends increasing to 7c from 6.25c previously. Also, it divested some of its traditional business for a profit and that might also had lead to price increase. There's some points I'd like to read up on Singpost given time and they are listed as follows: 

• Sustainability of dividend
• Debt obligations and dividends against earnings
• P/E and P/B valuations (Benjamin Graham had advocated sale of share when it reaches overvaluation state. Therefore, I want to see if Singpost is grossly overvalued and warrant a sale. It is unlikely though, as I regard Singpost as my crown jewel. I know falling in love with stock is no good..)
• Review growth of earnings (can be quite hard as Singpost recently changed its accounting practice)

Lastly, HPH Trust has been slowly dipping through the month of June while Bank of Ireland closed pretty high at the end of June amidst signs of Greece coming out of the talks with a solution. 

There was no dividend issued for the month of June. Hence, dividend received remains at $278.25


**Edit: Chart removed because I set it to update with latest information -- not accurate info

My Stock Holdings (May)

Many companies are reporting their financial results this month and this lead to some price fluctuations. In my portfolio, all had reported their results with the exception of Bank of Ireland. As of now, I have no intention to sell any stock in my holding based on the results. Hence barely any change in the composition of my holding.

Also, I'm scouting for good stock to add to the portfolio and will buy in when I return to Singapore from my exchange.

One of my criteria for buying a stock is that it must give out dividend. Singpost, ST Eng and HPH Trust gives out dividend in my portfolio. Bank of Ireland is an exception as I recognise that it is a high growth stock and does not necessarily need to give out dividend.

As of May 2015, I received a total dividend of $278.25

**Edit 1: Revised dividend amount to a lower value as I accidentally calculated dividends I haven't receive.

**Edit 2: Chart removed because I set it to update with latest information -- not accurate info

Hutchison Port Trust (NS8U.SI)

Hutchison Port Trust (HPH Trust) started trading with much fanfare on 2012. Listed in SGX, it is touted as the world's first publicly traded container port business trust. HPH Trust owns interest in container port assets in Hong Kong and Shenzhen - two of the busiest ports in the world. In 2013, its container berth handled a combined throughput of 22.8m twenty-foot equivalent unit (TEU).

HPH Trust is one of the thirty components in Straits Times Index (STI), having replaced F&N in 3 April 2013. As of 13 December 2014, it is also the highest yielding stock within STI at 7.8%. On 27 October 2014, the company ended the third quarter with an operating profit of HK$1.24 billion, a 3.5% increase year-on-year.

Given the high dividend that HPH Trust pays out every year, one should be prudent and check whether these dividends are sustainable into the future. The key objective of the Trustee-Manager was stated in the 2013 Annual Report as the following: "... to provide unitholders with stable and regular distributions and long-term growth in distributions per unit (DPU)" However, a quick look at the DPU since IPO was actually decreasing.

This also points out the deceptive nature of dividends yield. Dividend yield is based on past dividends and definitely not indicative of future dividends. Furthermore, dividend yield is based on current stock price and this means that falling stock price inflates dividend yield. For instance, HPH Trust indicated that it is distributing 45.88 HK cents in its IPO Prospectus and that translated to 5.8% dividend yield based on IPO price of US$1.01. However, due to the subsequent price fall to US$0.78, the yield had been bumped up to 7.5%. Hence, a lesson to take home is that stock purchase should not be based solely on the dividend yield number.

Besides the falling distributions, there are also a few points that does not paint a rosy picture of its financials. The first point is the enormous payout ratio. In 2011, the payout ratio is 167%. Next year, it increased to 199% and subsequently stood at 213% in 2013. Such high numbers indicated the distributions were likely unsustainable and that might have been the reason why distributions were falling. 

The trust might be able to give out that much dividends with its positive operating cash flow but quick inspection of the cash pile over the years indicated that it is dipping into its coffers to give such high dividends. In other words, the distributions for the past 3 years are unlikely to be sustainable. The Trust must find ways increase its profits otherwise unitholders will be looking at reduced distributions.

Another point of concern is the liabilities of the Trust. While the debt to assets ratio are pretty reasonable at below 50%, we can see that significant portion of the liabilities have been transferred to Current Liabilities recently. Current Liabilities are debts and obligations due within one year and with significant increase in that amount, a cut in dividend might be plausible in the near future. 

With all these data, is HPH Trust properly valued at US$0.69? Analysts opinions were quite differing with UBS having at TP of US$0.67 and DBS at US$0.78. However, one common point in both reports was that the management was considering whether to match cash flow generation to distribution payout more closely. Given that cash flow were negative in 2012 and 2013, distributions look to be suppressed in the mid- to long-term.  

Having bought HPH Trust at US$0.68 way back in 21 November 2013, I am fairly pessimistic about the dividend outlook. However, since I am comfortable with dividend yield above 6.5%, I will hold on to it until capital gains (around US$0.725) justify me switching out to other dividend stocks.