Hutchison facing tough questions as Italian job stalls
Canning Fok urged to deliver on pledge for greater openness on its sometimes opaque business plans, writes Ken Lo
Hutchison Whampoa's troubled 3G mobile operation wants to teach the market a lesson.
According to managing director Canning Fok Kin-ning, the problems that led to the collapse of its 3 Italia initial public offering were not its own. The market, he argues, misunderstood the unit's potential.
All that investors need is to be educated in how Hutchison runs its business for it to realise its Euro9 billion ($83 billion) benchmark valuation and for its share price to soar.
If only it were that easy.
While analysts agree that more investor knowledge about Hutchison's mobile operation would have helped its 3 Italia float, its insistence on a Euro9 billion valuation ensured the IPO tanked - and there are still doubts it will make the valuation even with its plans for a private placement. Analysts say a more realistic figure would have been Euro6.5 billion to Euro8.5 billion.
But the market still believes that Hutchison's 3G foray has much to offer. Even though it did not make the benchmark, the shelving of the float has had no negative impact on Hutchison's net asset value.
Fitch Ratings yesterday revised Hutchison's outlook to 'stable' from 'negative', given its ongoing net debt cutting efforts and an expected further improvement in overall profitability and credit ratios as losses in its 3G units abate.
Fitch estimates the firm's net debt fell to less than $170 billion at the end of last year from its peak of $185.7 billion in the first half of last year, mainly through asset sales.
Despite this, concerns over the future of its share price remain.
According to Christina Chung, a senior fund manager at Allianz Dresdner Asset Management, the recent dip in Hutchison's stock - about 8 per cent - was directly attributable to investor disappointment over the listing's failure.
Dani Schuttle, a telecommunications analyst at Credit Lyonnais, said in a report that he was likely to stick to the original forward price target of $94 per share over 12 months even though he expects the share price is likely to trade in the short term at a deep discount, down 20 per cent to 25 per cent at $68 to $72.
Analysts have long demanded that Hutchison provide more information on its sometimes opaque business plans. They say it has yet to provide end-of-year operational data about its British mobile unit, 3 UK, an oversight that has done little to inspire confidence.
'To narrow the trading discount, I think the company first needs to offer more information to investors, as Canning Fok has promised. Second, it should only keep those businesses its management has the expertise to run,' said an analyst from a US brokerage.
It was this sentiment that led to the demise of the 3 Italia float which had been seen as having the potential to return an exceptional profit for Hutchison. Instead, it will plunge it into the red, forcing it to breathe life into its distressed 3G business and possibly offloading part of its 35 per cent stake in Canadian oil firm Husky Energy.
Buoyed by soaring oil, Husky's stock hit a record high of $C64.70 ($434.92) this month from C$25 a year ago, inflating its market value to C$27.4 billion at its highest level.
'As an investor looking for a pure play, I would buy into Husky rather than wager on Hutchison's management. I can't see why Hutchison needs to keep Husky,' said the analyst.
Investors normally go to conglomerates for diversification. But fund managers say they would rather pick and choose for their clients rather than entrust the job to a management in the difficult position of needing to tell its investors where it is headed without alerting its rivals to what it is doing.
The challenge facing Hutchison following 3 Italia's failed IPO is to show investors that it is capable of managing a good business, just as it does with its port operations.
But according to one analyst, it must also consider its limitations: 'While it may be wise for Hutchison to teach investors how it runs its business, it might be more important to tell them when it can't.'