CKHUY - CK Hutchison: A Mixed Bag After 2022 Results

2023-03-20 14:36:22 ET

Summary

• CK Hutchison's FY 2022 headline net income rose +10% and exceeded expectations, but its adjusted net profit for the recent fiscal year would have decreased by -5% excluding non-recurring gains.
• The company hiked its dividend per share payout by +10% for FY 2022, but its dividends are most probably going to decline in FY 2023.
• Looking forward, CK Hutchison's Retail and Ports businesses are well-positioned to deliver good results in 2023, but this will potentially be negated by higher interest and energy expenses.
• I rate CK Hutchison's shares as a Hold, as I have a mixed view of the company's recent results and 2023 outlook.

Elevator Pitch

My investment rating for CK Hutchison Holdings Limited's ( CKHUY ) [1:HK] stock is a Hold.

With my prior article for CK Hutchison written on September 27, 2021, I evaluated the company's financial performance for the first half of 2021. In this latest write-up, my focus is on the review of CK Hutchison's full-year fiscal 2022 financial results that were announced on March 17, 2023 .

I downgrade my rating for CK Hutchison from a Buy previously to a Hold now. CK Hutchison's FY 2022 results were a mixed bag; its reported net profit surpassed expectations, but its net income would have declined if adjusted for one-off items. Moving ahead, CK Hutchison's bottom line and dividends are expected to decrease in the current fiscal year, notwithstanding the stock's undemanding valuations. A Hold rating for CK Hutchison is fair considering the above-mentioned factors.

Above-Expectations Headline Results Were Boosted By Non-Recurring Items

Revenue for CK Hutchison rose by +3% YoY from HK$445.4 billion in FY 2021 to HK$457.2 billion for FY 2022. CK Hutchison's actual FY 2022 top line also turned out to be +3% above the sell-side analysts' consensus revenue projection of HK$445.8 billion as per S&P Capital IQ data.

The company's headline net income attributable to shareholders of HK$36.7 billion for FY 2022 came in +7% higher than the market's consensus bottom line estimate of HK$34.4 billion (source: S&P Capital IQ ). This also implied that CK Hutchison's net profit had expanded by +10% in FY 2022 as compared to its FY 2021 net income of HK$33.5 billion.

However, CK Hutchison's adjusted net income would have decreased by -5% in the most recent fiscal year, if adjusted for non-recurring net gains of +HK$9.7 billion and +HK$4.9 billion for FY 2022 and FY 2021, respectively. As disclosed in the company's FY 2022 earnings announcement , CK Hutchison's key non-recurring items for the prior year included gains relating to "the disposal of the Group’s interest in the UK tower asset to Cellnex" and "the merger of the Indonesian telecommunication business."

Specifically, the strength in CK Hutchison's Ports business was more than offset by weakness with the company's Retail and Telecommunications businesses last year. The Ports business segment saw its operating profit rise by +9% to HK$13,024 million in FY 2022 benefiting from an increase in storage income. On the flip side, EBIT for the company's Retail and CK Hutchison Group Telecom business segments decreased by -12% and -42% to HK$11,831 million and HK$14,216 million, respectively for FY 2022. CK Hutchison's Retail business was adversely affected by COVID-related lockdowns in China, while inflationary cost pressures and unfavorable foreign exchange movements hurt the company's CK Hutchison Group Telecom business.

FY 2023 Dividends Might Be Lower

CK Hutchison's dividend payout for the most recent fiscal year was decent. The company maintained its dividend payout ratio at 30% (based on headline earnings), and its FY 2022 dividend per share grew by +10% to HK$2.926 in absolute terms.

But there are expectations that CK Hutchison's dividend payment for FY 2023 will be lower. As per the sell-side's consensus financial forecasts taken from S&P Capital IQ , CK Hutchison's dividend per share payout is projected to decrease by -4% from HK$2.926 in FY 2022 to HK$2.810 for FY 2023.

At the company's FY 2022 earnings briefing , CK Hutchison stressed that the company's dividend policy is to "maintain our payout ratio steady and to have dividends increase as earnings increase." In other words, CK Hutchison doesn't commit to an absolute level of dividends. Considering that non-recurring gains made up more than a quarter of the company's FY 2022 headline earnings, it is reasonable to assume that CK Hutchison's actual dividend payments (assuming a consistent payout ratio and lower reported net income) are likely to be lower in the absence of substantial non-recurring gains or core earnings growth for FY 2023.

Mixed Outlook For FY 2023

CK Hutchison's prospects in the current fiscal year are mixed.

On the positive side of things, the company's Retail and Ports businesses should perform better this year.

CK Hutchison's Retail business should benefit from China's pivot away from its COVID-zero strategy and reopening. Management noted at the company's FY 2022 results call that "positive momentum is continuing from last year and the first two months of 2023" for its Chinese retail operations. Separately, CK Hutchison has guided for throughput recovery for its Ports business to materialize in the second half of 2023 as supply chain issues subside.

On the negative side of things, CK Hutchison is likely to face headwinds relating to higher energy costs for its European telecommunications operations and increased interest expenses.

The company's European telecommunications business isn't hedged against energy cost increases to a considerable degree this year. CK Hutchison disclosed at its most recent quarterly earnings call that it was "70% to 90% hedged in most of our major telecom markets" like Europe in 2022, and emphasized "that is not the case in 2023."

Also, CK Hutchison's bottom line for this year might be affected by a meaningful spike in interest costs. About a quarter of the company's debt will need to be refinanced in 2023, and CK Hutchison's cost of debt for FY 2022 was pretty low at 2.0%. It is highly probable that the company will need to refinance existing low-cost debt with new debt which will carry higher interest rates.

Based on S&P Capital IQ's consensus financial estimates, analysts are expecting CK Hutchison to register a -6% decline in reported earnings for FY 2023. This seems realistic, taking into account the company's significant non-recurring items for 2022, and the mixed revenue & cost outlook for its key businesses (as detailed in this section).

Closing Thoughts

I have a Hold rating for CK Hutchison's shares. CK Hutchison's stock isn't expensive, considering its consensus forward normalized P/E of 5.6 times and dividend yield of 5.8% (source: S&P Capital IQ ). But there doesn't seem to be any meaningful catalysts in place to re-rate its shares in 2023. As such, CK Hutchison is rated as a Hold.

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