CKHUY - CK Hutchison: Spotlight On Interim Dividend And Potential Catalysts

2023-08-18 05:28:25 ET

Summary

• CK Hutchison's 1H 2023 dividend per share declined by -10% YoY, which was below the market's expectations.
• There are potential re-rating catalysts for CK Hutchison relating to share repurchases and asset monetization, but it will likely take a while for these catalysts to be realized.
• CK Hutchison's Hold rating remains intact, taking into consideration the company's interim dividend and potential catalysts.

Elevator Pitch

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

In my prior update for CK Hutchison published on June 6, 2023, I wrote about the company's "capital return and geographic focus."

I touch on CK Hutchison's interim dividend and the potential catalysts for the stock in this latest write-up. The company's actual 1H 2023 dividend distribution disappointed the market, which led to a meaningful pullback in its shares. There are potential catalysts that could potentially bring about a positive re-rating of CK Hutchison's valuations, but it will most probably take some time for the catalysts to be realized. Therefore, I maintain my Hold rating for CK Hutchison.

CK Hutchison has share listings on both the OTC market and the Hong Kong Stock Exchange. The three-month mean daily trading value for CK Hutchison's OTC shares is decent at roughly $0.9 million (source: S&P Capital IQ ), while the company's Hong Kong-listed shares boast a relatively higher three-month average daily trading value of around $25 million. Readers have the option of trading in CK Hutchison's Hong Kong-listed shares using US stockbrokers such as Interactive Brokers.

1H 2023 Dividend Was Below Expectations

CK Hutchison previously announced in early August that it will pay out an interim dividend per share of HK$0.756 for the first half of 2023 to shareholders on September 14.

The company's actual 1H 2023 dividend distribution was approximately -10% below its 1H 2022 dividend payment of HK$0.840 per share. The core net profit for CK Hutchison decreased by -13% YoY from HK$12,843 million for 1H 2022 to HK$11,208 million in 1H 2023, but the company chose to maintain its interim dividend payout ratio at a similar level (26% rounded off) as last year. This explains why CK Hutchison's interim dividend declined significantly on a YoY basis.

The 1H 2023 dividend for CK Hutchison fell short of the sell-side analysts' expectations. Based on data sourced from S&P Capital IQ , the market's consensus full-year fiscal 2023 dividend per share estimate for CK Hutchison was lowered by -17% from HK$2.78 (prior to the company's recent first-half results announcement) to HK$2.31 now. This implies that CK Hutchison's dividend per share distribution could potentially drop by -21% in full-year FY 2023, assuming that the sell-side's consensus forecasts turn out to be accurate.

CK Hutchison didn't guide for the potential dividend distributions in 2H 2023. But CK Hutchison indicated at its 1H 2023 results briefing that it will "closely monitor the macro-environment" and consider its "investment decisions" so as to "determine the appropriate returns to our shareholders." In my opinion, the company's comments suggest that there is uncertainty over CK Hutchison's future dividends depending on the strength of the economy and its capital expenditures.

CKHUY's share price has corrected by -12% from $5.94 as of August 2, 2023 to $5.23 at the end of the August 17, 2023 trading day. This implies that investors have reacted negatively to CK Hutchison's interim dividend cut.

In the next section, I highlight and evaluate potential re-rating catalysts for CK Hutchison.

Potential Catalysts Are Unlikely To Be Realized In The Near Term

I am of the view that share repurchases and asset monetization are the major potential catalysts for CK Hutchison, but I don't think that these catalysts will materialize for the stock anytime soon.

With regards to share buybacks, the previous time CK Hutchison repurchased its own shares was more than eight months ago on December 8, 2022 . Between December last year and mid-August this year, CK Hutchison was valued by the market at consensus forward normalized P/E multiples in the 5-7 times range, but the company didn't even buy back its own shares at such undemanding valuations.

Looking forward, CK Hutchison didn't commit to resuming share buybacks for certain in 2H 2023. At the company's 1H 2023 earnings call, CK Hutchison noted that it "may resume that (share repurchases) in the second half", but it stressed that "the pace of the actual buyback is opportunistic and will depend on market conditions." The company also emphasized at its recent interim results call that its top priority is to allocate capital to investments that support "organic growth of the businesses."

In a nutshell, there is no certainty that CK Hutchison will start repurchasing shares again in the second half of the current year. Even if CK Hutchison does buy back its own shares, the actual amount of capital allocated to share repurchases might not be significant as the company's focus is still on capital investment.

In terms of asset monetization, the potential disposal of CK Hutchison's stake in Cenovus Energy Inc. ( CVE ) might be a catalyst for the stock, but this isn't likely to happen in the near term.

On the company's corporate website , CK Hutchison revealed that it has a "15.71% interest" in Cenovus Energy, which it describes as "an integrated energy company with oil and natural gas production operations in Canada and the Asia Pacific region." The current value of CK Hutchison's stake in CVE is worth about $5 billion.

At its 1H 2023 results call, CK Hutchison reiterated that it "is not the operator of our oil and gas business in Cenovus" and highlighted that its "investment in Cenovus was part of diversification." This suggests that CK Hutchison is open to the possibility of eventually divesting its stake in Cenovus Energy.

On the flip side, CK Hutchison will only be allowed to sell off its entire interest in CVE in full by January 2026 as per lock-up restrictions it agreed to when it acquired its stake in Cenovus Energy. Also, CK Hutchison mentioned at its recent interim results briefing that it currently views its interest in Cenovus Energy as "a natural hedge for energy cost increases in other businesses."

In other words, CK Hutchison has the intention to monetize its stake in Cenovus Energy, but the sale of CVE's shares is unlikely to be done in the short term.

Closing Thoughts

I retain a Hold rating for CK Hutchison. The company's stock price has suffered from a correction in recent weeks as a result of its below-expectations interim dividend. CK Hutchison's shares have the potential to rise if key catalysts relating to asset monetization and buybacks materialize, but I think that these catalysts won't be realized soon.

For further details see: