The Three Numbers That Laden Hutchison Port Holdings Trust

What can be more lucrative than being a port owner? After all, there aren’t that many places along a coastline that can accommodate an infrastructure such as a harbour.

For starters, the waters around the port have to be deep enough to allow ships to enter and leave. And there aren’t that many places in the world which have that important attribute.

So by all accounts, business trust Hutchison Port Holdings Trust (SGX: NS8U) should be raking in the money. But in reality it can be a hostage to events outside of its control.

Hutchison Port Holdings Trust (HPHT) has one of the lowest Returns on Equity (RoE) amongst Singapore’s blue chips. While the average RoE for the 30 companies that make up the Straits Times Index (SGX: ^STI) is around 8%, the business trust’s RoE is about a quarter of that. In other words, it only generates about S$2 of bottom-line profit for every S$100 of shareholder equity.

The low RoE is almost certainly not due to a lack of profitability. Its Net Income Margin of 13.9% is only a smidgen lower than the market average. It implies that HPHT generates $13.90 of profit on every $100 of sales.

The port owner is not heavily leveraged, either. Its Leverage Ratio of 1.6 is roughly in line with the median for the Singapore market.

Hutchison Port Holding’s Achilles heel, however, lies in its low Asset Turnover of 0.09. This is about five times lower than the market average. As a port owner, HPHT need to own lots of assets – around S$22b at the last count. However, top-line revenues hinges on maritime trade, which, for now, has not shown signs of recovery.

Having some understanding of the nature of Hutchison Port Holdings Trust’s business model could help shine a light on its Return on Equity. Its RoE of 2.0 is laden by the product of an acceptable Net Income Margin of 13.9; a depressed Asset Turnover of 0.09 and a modest Leverage Ratio 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.