EUR 850.00 For Business Accounts Only

Morningstar | Factoring in Lower Ports Growth Outlook, Our CK Hutchison FVE Falls to HKD 106

Given global trade tensions, risk of slower growth in China, and uncertainty about the near-term outlook for U.K. trade activity, we have cut our five-year growth projections for CK Hutchison’s ports activities, leading to a reduction in our sum-of-the-parts fair value estimate to HKD 106 per share from HKD 118. While 30%-owned associate Hutchison Ports Holdings Trust recently reflected a HKD 12 billion write-down of goodwill, we believe negative goodwill from the purchase of the balance stake in Wind Tre will offset the share of HPHT’s losses. As a result, we have not factored in any significant one-off items to our 2018 estimates for CKH. We think CKH remains relatively attractive at the current price level, trading at just 0.6 times price/book. Outside of its ports activities, we anticipate stable performance by its other key segments. The 50% Wind Tre acquisition will help drive EPS growth of 17% in 2019. However, organic growth is just in the midsingle digits in our midcycle outlook.

Trade war impacts aside, we factor in a slower growth trajectory for China and continued transhipment volume pressure for its Asian ports. This is expected to weigh on CKH’s ports revenue growth. As a result, our base-case valuation of CKH’s ports assets is lowered by 35%. Average five-year ports revenue growth is reduced to 4.5% from 6.6% and EBITDA growth to 5.2% from 7.4%. We also lowered contributions from Husky Energy on weaker 2019 and 2020 oil price assumptions.

Reduced ports and Husky Energy contributions are offset by slight increases in retail and telco estimates, and the net change to our earnings estimates are minimal. It appears that challenges for CKH's retail and telco activities are abating. The retail division is stable, and Wind Tre’s market share loss should be slowing as its network upgrade is addressed. Capital expenditure is likely to be stable at around 10% of revenue, and we don’t expect significant acquisitions in 2019, although spin-offs are possible.

CKH’s full-year 2018 results will be released March 21, and we think that if its retail arm shows a similar trend in growth to that seen in the first half, there could be room for further upside. The A.S. Watson Group is accelerating its digital platform and aiming to arrest slowing revenue growth. First-half 2018 performance saw China sales growing 16% year over year, the strongest pace since 2013. The rest of the regions also reflected similar robust growth, which the group attributes to improving new store experiences and growing e-commerce. Its non-health and beauty stores also saw its first growth in first-half 2018 since 2014. At the moment, we remain cautious in our outlook for its European sales and factor in mid-single-digit growth in overall retail revenue, given signs of weaker consumer sentiment in the second half of 2018.

3 Group numbers could be slightly confusing given the acquisition of the balance 50% stake in Wind Tre. However, we think the market is more likely to react positively if the group is able to slow the trend in subscriber losses and negatively if losses are greater than expected. Given Telecom Italia’s disappointing preliminary results, we have assumed that Wind Tre’s EBITDA margin declines to 39% from 2017’s 40%. However, because Wind Tre is leasing network space to Iliad, the pressure on Wind Tre’s earnings from Iliad’s entry is expected to be buffered. Growth may still look strong due to the acquisition impact, but we’d be watching for signs that it can limit subscriber loss. The other key telco business is 3 U.K., where we expect to see mid-single-digit EBITDA growth in local currency terms but relatively flat operating income because of increased depreciation. CKH management is guiding for high-single-digit EBITDA growth for 3 U.K. in local currency terms.

Infrastructure contributions should be stable. Although CKH has essentially sold off the bulk of its directly held utilities to CK Infrastructure and other related companies, it will still consolidate part of the assets’ contributions through CKI. The 2018 contribution should still see decent high-single-digit growth given that it will be the first full year of consolidation of German meter reader Ista and Australian pipeline assets from Duet Group. Currency headwinds will hinder second-half performance. We expect a drop in CKH’s consolidated infrastructure operating income in 2019 due to the sales of the directly held assets but also because of the decline in returns from Hong Kong Electric. Revenue from the expansion of Husky’s product pipelines will help offset the gap in Hong Kong Electric’s contributions to CKI. There is no change in our expectations for CKH’s infrastructure segment to average 3% growth in Hong Kong dollar terms. Other than the currency impact, we don’t see a significant Brexit impact to CKH's U.K.-based utilities.