The 3 Numbers That Weigh Down Hutchison Port Holdings

hutchison port holdings logoIf you think about it, ports should be a lucrative investment. After all, there aren’t that many places that you can situate a port.

Firstly, a port has to be near water. That’s pretty obvious. The water also has to be deep enough. That’s another given. So, why then does Hutchison Port Holdings Trust (SGX: NS8U) exhibit such a disappointingly low Return on Equity (RoE)?

The port operator, whose assets include four deep-water terminals in Hong Kong and China, only managed to generate returns of around 2.6% on investors’ equity. In other words, it has delivered $2.60 of profit for every $100 of equity invested in the business. Last year’s RoE of 4% was equally disappointing. That said, the return in 2010 was significantly higher.

Surprisingly, Hutchison Port’s Net Income Margin is quite high. At 18.4%, it is about the same as Singapore’s other blue chips. The average for the companies that make up the Straits Times Index (SGX: ^STI) is 18.9%. Last year, Hutchison Port made around $18 on every $100 of sales generated. In 2011, it was 20% and in 2010, the port owner made 24%.

However, Hutchison Port’s Asset Turnover stood at 0.09 last year. It has been higher in previous years, but at this level, it only generated $9 of revenue for every $100 of asset employed in the business. In some ways, that is quite telling. It might be a reflection of the subdued state of global trade. If fewer goods are imported and exported, demand for shipping is reduced and in turn ports could be under utilised.

Interestingly, Hutchison Port Holdings doesn’t use massive amounts of debt to finance its business. A Leverage Ratio of 1.6 is about average for Singapore stocks.

By taking apart Hutchison Port Holdings’ Return on Equity, it is easy to see what is weighing the company down. Its RoE of 2.8% is the product of a high Net Income Margin of 18.4%; a low Asset Turnover of 0.09 and a modest amount of Leverage of 1.6.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.