Should You Be Tempted To Sell China Merchants Port Holdings Company Limited (HKG:144) Because Of Its PE Ratio?

The current price of 144 places the company at a fair trailing PE of 9.02x, quite similar to the Infrastructure’s average of 8.89x. But can investors make a closing judgement of the company’s value based on this multiple? The answer is no, since important variables like the company’s potential to grow and debt levels are ignored in the PE’s calculation. In this article, I am going to take you through some key things to consider in order to identify which multiple is the most relevant for 144. Let’s take a look below.

How much does 144 earn?

PE is only used when a company is profitable, such as 144. This is because companies that are unprofitable or have recently become loss making cannot be valued using price-to-earnings since there are no earnings. Companies like this are often valued based off other relevant factors, using multiples like P/S (price-to-sales) or P/FCF (price-to-free-cash-flow) depending on the business characteristics. Historically, 144 has always managed to produce positive profits for investors. With upcoming earnings expected to remain positive, PE can be a valid multiple to apply to the company, but let’s see if there is a better alternative.

SEHK:144 Future Profit June 21st 18
SEHK:144 Future Profit June 21st 18

Is 144 in a lot of debt?

Using debt-to-equity as a guide, 144 does have debt on the balance sheet but it is at a prudent level at the moment. The D/E ratio shows us that the current level of debt only makes up 31.86% of the company’s equity. This is a suitable range, however, risk associated with debt obligation still exists, as with any company with debt on the books. This isn’t an alarming amount, but investors should still proceed with caution.

SEHK:144 Historical Debt June 21st 18
SEHK:144 Historical Debt June 21st 18
Debt levels matter when valuing the business because in theory 144’s share price represents the equity portion only, but its important to account for debt, as debt represents a liability to the owner, and it impacts the earnings capacity and risk profile of the company. By using enterprise value (EV) rather than current share price, the multiple incorporates debt, allowing us to recognise both sources of funding. This is frequently used in the EV/EBITDA multiple.

144’s EV/EBITDA = HK$91.95b / HK$0 = 24.67x

Comparing 144’s multiple to the 24.67x for the industry suggests the company is overvalued, as opposed to the fair valuation indicated by the PE ratio.

Does 144 have a fast-growing outlook?

Earnings are forecasted to decline at -0.60% annually for the next 5 years, which isn’t a desirable expectation for the mid-cap stock. Usually it would be argued to adjust multiples to be forward-looking, but due to the relative stability going forward, using current EBITDA should suffice. In scenarios where there isn’t stability, using analyst’s forward estimate of EBITDA is recommended. For 144, this results in a similar multiple of 24.67x.

Next Steps:

Looking at relative valuation alone does not give you a complete picture of an investment. There are many important factors I have not taken into account in this article. If you have not done so already, I urge you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for ’s future growth? Take a look at our free research report of analyst consensus for ’s outlook.
  2. Past Track Record: Has been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of ‘s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.