Uncertainty likely to weigh near term but fundamentals remain intact
While we see limited operational impact on CKH from the Brexit, given thedefensive nature of most of its European exposures, uncertainty around theglobal market conditions and FX is likely to weigh on the stock in the nearterm. That said, we continue to like the fundamental strength of the business,given its strong cash flow and potential for capital management and, shouldthere be further dislocation in the market, the increased opportunities to pickup assets cheaply. Furthermore, our European team now sees a strongprospect of the Wind deal in Italy being approved, which we estimate coulddrive up the valuation by ~4%. As such, we retain our Buy rating.
Brexit not helpful for valuation and near-term sentiment
The currency depreciation from the Brexit outcome is clearly not helpful forCKH, with 37% of its EBIT coming from the UK (~30% of valuation). We expectnear-term sentiment on the stock to remain negative, given uncertainty aroundfurther FX depreciation and potential spillover into the European market. Withthe 1H16 result also likely to be subdued, given lackluster port volumes andweak retail in China, there may be some further short-term pain to come.
Fundamental remains intact and valuation supportive
With over 90% of CKH’s UK business in stable and defensive sectors such asutilities and telecoms, we expect limited operational impact from the leaveoutcome. Our long-term growth thesis on retail and telecom turn-around alsoremains intact given they are not overly dependent on the UK economy.Furthermore, at current valuations, we see capital management as anincreasingly likely outcome, which could come as early as the FY16 result.
Earnings changes
We have reduced our net profit forecasts by ~5% to reflect our revised GBPforecasts (1.15 vs. USD by YE16). We have, however, increased our payoutratios to reflect the declining capex profile and strong cash flow generation.
Valuation and risks
We value CKH using a combination of SoTP and DCF. Key downside risksinclude: HKD appreciation, higher borrowing costs and economic slowdown.