CK Hutchison Holdings - Solid company - worth over 2 times its price
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So lets talk about CK Hutchison or "The group":
I had a position in this stock in a long time. The performance has not been good, but as a consequence the opportunity is higher than it was before, and I have added to my position.
CK Hutchison, based in Hong Kong, is a unique business with a very global and mostly western world earnings base.
It trades at a 5.6 PE ratio and 5 to 6 % dividend yield. (It is a holding company).
It is a $24B market capitalisation and I did not find the company to have a hidden earnings stream or anything that would make me question the current PE ratio, which is accurate to me. It trades at a nearly 20% earnings yield.
It must be distressed? Indebted? Cyclical?
Lets dive in.
The company has 5 segments.
The EBIT, underlying and pro rata is
Ports & Related Services 18%
Finance, Investments and others 4%
Geographically we have, for EBIT
Asia, Australia and others 22%
Hong Kong 5%
Investments without classification 4%
Lets see the segments and their prospects.
CK Hutchison holds a 75.67% interest in CK Infrastructure Holdings Limited (CKI) (stock code: 1038).
It also has stakes in some of the infrastructure that CK Infrastructure owns.
(...)Energy infrastructure, transportation infrastructure, water infrastructure, waste management, energy-from-waste, household infrastructure and infrastructure related businesses. It operates mainly in Hong Kong, Mainland China, the United Kingdom, Continental Europe, Australia, New Zealand and Canada
This is a very diversified part of the business. The company has been a slow grower in the past years.
To get a better idea on this segment prospect, its always good to read the CKI reports. After a very tough two years due to pricing regulatory resets and covid lockdowns, things are looking better.
From the last interim report, we can read "The Group is optimistic about the outlook for existing businesses and continued organic growth. Many of CKI’s regulated businesses have recently completed their regulatory resets, securing stable and predictable income for the coming years."
Overall, I rate this segment as a slow grower. Especially that the subsidiaries retain some earnings to acquire assets.
The group owns 3 Europe, and HAT which is the Asian part, present in South East Asia.
3 Europe is the bulk of the business, with approx 95% of EBITDA.
It is to be noted that the HAT (Asian) group has more customers than the Europe group, so there is a huge potencial to increase EBITDA and revenue per user on the Asian side (Vietnam, Indonesia, Sri Lanka).
3 Europe is based in Western Europe, with Italy as the biggest contributor, followed by the UK and smaller European countries.
The telecom market in Europe is competitive, quite difficult and almost deflationary. The Italian business is difficult, the economy there is challenged.
This is kind of a low cost business with AMPU of 11 Euros per user.
The group has started to sell the tower assets for 10 Billions Euros, compared to a 24 Billion Dollar market cap, it is huge. 1.4 Billion is in Cellnex shares, the tower company with better economics than the Telecom business.
CK Hutchison is a consolidator in Telecom. In 2018, it bought for 2.45 Billion Euros, the remaining 50% it did not own in Wind Tre, the Italian leading telecom business.
We can see that this business provided 373 millions in H1 of EBIT, and 274 millions of EBITDA-CAPEX, so we have a multiple of under 10.
Considering that they sold the Italy tower assets for 3.3 Billion Euros this year, That means they got back 1.65 Billions for the 50% they bought for 2.45 Billions.
This year, the HAT group is participating in consolidation in the Indonesian market, with a cash investment of about 300 millions USD and it will end up with a stronger company able to obtain scale advantage.
Overall, I rate this segment as a slowly declining business. It is a bad business with god cash generation. However, due to the group consolidating and value creation moves, I rate it as good cash cow business.
The group operates health and beauty stores.
"ASW is the world’s largest international health and beauty retailer, with a network of over 16,200 offline and online retail stores in 25 countries worldwide."
This part of the group was affected by strict lowdowns in China, and not too much in Europe where the stores are essential stores. These are local stores in health and beauty that are not really affected by ecommerce.
This is a high quality part of the business which can growth through the opening of new stores, which comes with high returns on investments and cash paybacks within 12 months. It has 140 million loyalty members and the online business is growing fast, however the online numbers are not disclosed.
Overall, I rate this segment as a good growth business.
Ports & Related Services:
The group owns ports and related services all around the world.
It is 25% in Europe, 17% in China, and the rest mostly in Emerging markets.
The ports suffered a bit from the commercial war and de-globalisation for the 17% Chinese ports, but I think that in the next decades these will be busier and busier with shipments from the rest of the world and to Africa and Asia. It showed good growth in H1 2021, going over H1 2019.
In my opinion it is a very high quality slow growth business.
Finance, Investments and others
This segment, which appears small, is not to be ignored.
-The group owns 16% of Cenovus energy, after a merger of Husky energy. Cenovus energy is a very large Canadian oil sands low cost producer. It produced $1.3B USD of Free funds flow in the last quarter, or $5.2 B USD annualised, of which the part attributable to CK Hutchison is $800 millions USD on a market cap of $24 Billions USD. On a pro rata basis it is more than 10% of CKH profit, which is significant for the group.
Cenovus is soon going to start using this cash flow to repurchase shares aggressively (10% of current market cap).
Therefore earnings contribution should increase with time, and dividend flow to the group should follow after the buyback.
-Other investments include Marionaud Perfurme retailer in Europe, CK Life Sciences Int’l., (Holdings) Inc, Hutchison Telecommunications (Australia) Limited. HUTCHMED. HUTCHMED is developing new drugs and is still loss making, thus making this segment look less profitable than its underlying parts by masking some earnings.
I rate the quality of this segment as very high.
The way CK Hutchison presents its debt and Ebitda is confusing, but helpful in the end. The EBITDA is presented to represent their ownership percentage, which is neat.
The cash and liquid investments used to calculate net debt, do not include their gigantic listed main investments, but cash and bonds. It is very conservative.
-Net debt as calculated by deducting it to cash and liquid investments, went from $205B HKD to $164B HKD in a year, Or a LTV of 19% from 25%. (their $190B HKD cash and liquid investments deducted are 96% cash, 3% Bonds and 1% stocks and do not seem to include the listed CKI, Ports or Cenovus listed investments).
Total Debt is $351 B HKD.
-29% of the Group’s total principal amount of bank and other debts were at floating rates and the remaining 71% were at fixed rates. The debt carries a very low interest rate of 1.6% which could become a problem with refinancing costs.
-Using pro rata EBITDA of $98 B HKD divided by Net debt I get a debt ratio of 1.67 times.
With the proceeds from the Tower sales completed, CK Hutchison holdings reduced debt by 4.3 billions Euros or 37 Billions HKD.
The group bought back stock but it is a very low rate of buybacks at the moment, which is disappointing. (Less than 1% annually). This is I think, seen as a negative by investors.
The group has, as previously detailed, planned to use some cash to consolidate the Indonesia Telecoms market.
They recently bought some Hongkong Dockyards at an undisclosed price.
The company pays a stable 5 to 6% forward dividend.
The telecom business is a bad one but capital allocation skills and consolidation makes it pretty good. You got to give them consideration for the Italy consolidation then sale of tower assets, the combination in Indonesia, etc.
The other businesses are good, not great.
The capital position is good, some further deleverage of the gross debt would be nice but the company is robust enough.
The dividend is nice.
The buyback is too slow, but at least it is there as a start.
From the earnings conference call, here are the priorities of Victor Li the CEO:
Well, it's a couple of things, the top priorities. I think the -- if we engage in earnings and cash flow-accretive telecom deals, hopefully engaging in in-market consolidation, that would be -- that would be very good for the group.
The second one would be retail stores because they have a pretty good payback period. And continuing new investment in recurrent income in CKI, be it utility or steady income project that would also be a -- be a priority. But the two new areas would be debt repayment and share buyback. So, those two are, together with the earlier three, the five priorities, will be our focus.
Using my judgement, I think this business is not worth 20X due to Telecoms and Energy which are not top quality businesses, (Cenovus is high quality for an energy business thought).
Its not worth 10X due to Retail, Infrastructure and Ports being high quality businesses.
It is worth something in between, some 14X or 2.5 times the current price.
The good, long term oriented and owner oriented capital allocation of the group deserves a premium in my opinion, which I will not assign a numerical value here.
This trades at a 5.6 PE ratio. This market is insane with plenty of beautiful stocks to pick up on the ground and collect, and CK Hutchison is one of them.
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