Expect a weak set of 1H16 results
CKH is due to report its 1H16 results on 11 August. We expect a weak set ofresults with revenue down 4% yoy, EBITDA down 6% and EBIT down 5% dueto soft conditions in ports and retail, a decline in the average oil price andcurrency drag, partly offset by growth in the infrastructure and telecomdivisions. Brexit, M&A in Europe (including what might come of the O2 dealappeal) and capital management are likely to be the key topics of discussion.While the 1H16 results are unlikely to excite, the stock continues to screencheap on our fundamental valuation; retain Buy.
Losses at Husky and weak ports to drive the 1H16 earnings decline
We expect CKH to report weak 1H16 results with pro-forma revenue down3.6% yoy and EBIT down 4.6% driven by: 1) significant losses at the Huskybusiness; 2) a decline in throughput volumes for the ports business; and 3)subdued retail conditions in Asia with Watson’s Asian peer Dairy Farmreporting a 10% decline in operating profit in its H&B division – partially offsetby: 1) good operational performance in the infrastructure division with CKIreporting a 5% rise in net profit (partly one-off driven); and 2) solid operatingconditions in the telecom business in Europe. We note our 2% rise in 1H16 netprofit is due to a normalization in the tax rate and lower interest expenses.
Key issues to focus on
The key issues to focus on at the results announcement include: 1) prospectsfor and timing of the telco merger in Italy; 2) outlook for the retail business inChina, which has been experiencing tough macro conditions; 3) prospects forcapital management (though we think the decision is more likely to be made atthe FY16 result); 4) how management will deal with the impact of Brexit; and5) future M&A ambitions, particularly in Europe.
Valuation and risks
We value CKH using a combination of SOTP and DCF. Key downside risksinclude: HKD appreciation, higher borrowing costs and economic slowdown.