CKHUY - CK Hutchison: Watch Capital Return And Geographic Focus

2023-06-06 07:42:38 ET

Summary

• CK Hutchison doesn't provide specific quantitative guidance on the company's future dividend payouts and share buybacks.
• The company has indicated that it doesn't have a specific geographic revenue mix target, with financial returns being the most important consideration in assessing new investment opportunities.
• The uncertainty over future capital return and a lack of geographical focus suggest that CK Hutchison's Hold rating is fair.

Elevator Pitch

I continue to rate CK Hutchison Holdings Limited's ( OTCPK:CKHUY ) [1:HK] shares as a Hold. I previously reviewed CK Hutchison's FY 2022 financial performance with my earlier March 20, 2023 write-up .

CK Hutchison hosted the company's Annual General Meeting or AGM last month. The management's comments at this shareholder event as cited by the media offers relevant insights about CK Hutchison's shareholder capital return and geographic focus. Taking into account uncertainty regarding CKHUY's future buybacks and dividends and the company's future geographic sales mix, I choose to stick to my existing Hold rating for CK Hutchison.

CK Hutchison's Shareholder Capital Return

There is uncertainty about CK Hutchison's future plans relating to the return of shareholder capital via dividends and share repurchases.

According to Hong Kong local media Sing Tao Daily's May 19, 2023 news article (translated from Chinese to English using Google Translate), CK Hutchison stressed at its AGM that it can't offer guidance on future dividend payouts. Specifically, CKHUY emphasized that the distribution of dividends is dependent on multiple factors like "company performance, economic environment, and external issues", but it advised shareholders to look at its dividend "track record".

CK Hutchison's dividend per share grew by +15.0% and +10.0% to HK$2.66 and HK$2.93 for FY 2021 and FY 2022, respectively. But the current sell-side consensus financial forecasts for the company points to CK Hutchison's dividends declining by -5% to HK$2.77 per share for FY 2023.

In my opinion, there are certain factors which provide support for the assumption that CK Hutchison's dividend per share distribution might decrease in the current fiscal year.

One factor is CK Hutchison's refusal to commit to any forward-looking dividend guidance at the recent Annual General Meeting as highlighted above. It is also noteworthy that CK Hutchison cautioned that its future dividend distribution could be affected by external factors that are outside of the company's control.

Another factor is the company's dividend policy. CK Hutchison doesn't adopt a progressive dividend policy (stable and increasing dividends in absolute terms). Instead, the company typically pays out dividends based on a fixed payout ratio pegged to a proportion of earnings. In my late-March 2023 article for the stock, I noted that CK Hutchison's policy is to "maintain our (dividend) payout ratio steady" as indicated at its FY 2022 results call . This means that CK Hutchison's dividends going forward are very likely to rise and drop in tandem with future earnings.

Moving on to share repurchases, it is necessary to note that CK Hutchison hasn't bought back any of its shares since early December last year . While it is common for companies to suspend share buybacks during the black-out period prior to results announcement, CK Hutchison has yet to resume share repurchases after it released its FY 2022 results in late March this year.

As indicated in Sing Tao Daily's May 19, 2023 news article referred to above, CK Hutchison guided at the AGM that it is "likely to continue to use part of the proceeds from the sale of the UK towers to repurchase shares" in 2023. In the company's FY 2022 financial results announcement , CK Hutchison revealed that it had recognized a HK$15.8 billion gain associated with the divestiture of its tower assets in the UK that was concluded in November last year.

But CKHUY also mentioned at the recent Annual General Meeting that actual share buybacks will be dependent on "market conditions" and indicated that "the actual timing and amount (of share repurchases) can't be disclosed" yet.

In summary, the outlook for CK Hutchison's shareholder capital return is mixed.

On one hand, CK Hutchison has specifically highlighted the company's dividend track record (two consecutive years of dividend hikes) and it also indicated its intention to consider share repurchases.

On the other hand, the company hasn't provided specific quantitative guidance on its future share buybacks and dividends. This makes it difficult to estimate CK Hutchison's potential shareholder yield (sum of dividends and repurchases divided by market capitalization).

CKHUY's Geographic Focus

CK Hutchison's geographic focus is in the spotlight, following the company's management comments at its May 2023 AGM.

As per a May 18, 2023 Reuters news report , CK Hutchison's chairman Victor Li indicated at the company's Annual General Meeting last month that "the group would consider any quality project that can yield a favorable return, regardless of the location." It is worthy of note that CKHUY's chairman highlighted that "every market is a local market" for the company.

As disclosed in its earnings presentation slides , CKHUY generated 43% and 9% of its FY 2022 EBIT from Europe and Mainland China & Hong Kong, respectively. Other geographic markets and the company's Finance & Investments arm accounted for 27% and 21% of CK Hutchison's EBIT, respectively in the most recent fiscal year.

There are both positive and negative read-throughs from CK Hutchison's recent comments on the company's geographic focus.

On the positive side of things, it is good to know that CK Hutchison views financial returns as the most important yardstick for evaluating any new investments. This indicates that CK Hutchison won't diversify for the sake of diversification, which could potentially lead to sub-par returns in exchange for reducing geographic concentration risks at all costs.

On the negative side of things, CK Hutchison's focus on investment returns irrespective of geographic market means that it is tough to predict what the company's future geographic mix could look like in a few years' time. Considering that investors are trying their best to reduce their exposure to geopolitical risks within their portfolio, CK Hutchison's stock might find itself out of favor with some investors due to a lack of geographic focus. As an example, certain investors might turn positive on CK Hutchison, if the company chooses to increase its sales or earnings contribution from markets outside Mainland China and Hong Kong in view of current US-China tensions.

Concluding Thoughts

CK Hutchison's shares are now valued by the market at 6.2 times consensus forward next twelve months' normalized P/E and 0.35 times trailing P/B as per S&P Capital IQ's valuation data. While CK Hutchison's stock isn't expensive, there is a lack of catalysts relating to capital return or shift in geographic focus that could help to re-rate its shares. As such, my Hold rating for CK Hutchison stays unchanged.

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