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Would Warren Buffett Buy Hutchison Port Holdings Trust?

Warren Buffett is not averse to investing in infrastructure projects. After all, in 2009, he paid a 31% premium to get his hands on railway outfit Burlington Northern Santa Fe (NNSF) as a bet on a recovering US economy.

But what would the Sage of Omaha make of Hutchison Port Holdings (SGX: NS8U), which owns, operates and has interests in ports in Hong Kong and China?

HPH is a business trust. Business Trusts are similar to Real Estate Investment Trusts but with a difference. They are not restricted to paying distributions out of profits but they can also pay them from surplus operating cash flow.

Hutchison Port Holdings, which has only been on the market since 2008, has relatively low earnings volatility. Over the last six years, Net Income has come in at around S$400m, though it has been lower in the last couple of years.

Profit margins are respectably high. In the last 12 months, Net Income Margin has been 14%. But they were considerably higher in 2010 and 2011 when they were around 20%.

Unsurprisingly, HPH is not massively efficient given its substantial asset base. Ports don’t come cheap. The company only generated S$9 of revenues for every $100 of asset employed in the business. By comparison, Singapore’s blue chips generate around $50 for every $100 of asset employed.

Interestingly, Hutchison Port Holdings is not overly burdened by debt. Its Leverage Ratio of 1.6 is about average for the 30 companies that make up the Straits Times Index (SGX: ^STI). The low Leverage Ratio could help explain HPH’s lack of share price volatility.

Hutchison Port Holdings is a hefty dividend payer. While payouts dwarf earnings, they have only represented about 70% of cash flow from its operations.

It is hard to say for certain what Warren Buffett would make of a business trust such as Hutchison Port Holdings. It is not a typical Buffett share but he might just be swayed by the attractive cash flow from the investment.

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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.