UK—largest single market for CKH; mostly in defensive infrastructure assets
The UBS Strategy and Economics teams have highlighted three potential effects ofBrexit: GBP could de-rate to parity with the euro; UK GDP growth could be shaved by acumulative 3ppt through to 2020; potential knock-on effect on Eurozone GDP. In termsof CKH's exposure, we estimate approximately 31%/39% of EBITDA/NAV is derivedfrom the UK, of which approximately 60% is attributable to its defensive portfolioinfrastructure assets. If the GBPHKD rate deteriorates materially from here, it wouldpresent FX translation headwinds to CKH. We currently assume the spot GBPHKD rateof 10.6 to hold constant in our earnings and NAV forecasts.
We remain believers of CKH's cash flow story
In the immediate future, the stock is likely to be impacted by negative sentimentfollowing the “Leave” vote. However, with the stock trading at 35% to our revisedNAV estimate of HK$132/share and 2017E FCF yield of 8.0%, we think CKH has value.The European Commission is due to make a regulatory decision on the proposedmerger of 3 Italy and Wind Italia in September. If approved, we believe the marketcould shift focus back to CKH's cash flow story, which could drive a re-rating for thestock.
Lower EPS estimates 10%/14%/13% for 2016/2017/2018
The key drivers of our earnings cuts are: 1) the depreciation of the GBPHKD rate(assumed at 10.9/10.6 for 2016/2017 vs previous assumptions of 11.1/11.1); 2) lowerPorts throughput in Europe (-5%/-5% YoY for 2016E/2017E, previously -3%/+2%); 3)lower same-store-sales-growth for Western Europe (1%/0% YoY for 2016E/2017E,previously 2.5%/2.5%). We maintain our 3 Group contribution forecast, which is a netresult of improved fundamentals in Italy and Denmark offsetting FX translation impacton the UK business.
Valuation: maintain Buy; lower PT to HK$99.00
Accordingly, we cut our end-2016 NAV estimate 7% to HK$132/share. We also assumea wider target NAV discount of 25%, from the previous 15%, to account for likelyweaker investor sentiment on the stock post Brexit, resulting in a 17.5% cut in ourprice target from HK$120.00 to HK$99.00.