Solid FY17 results but in-line dividend and unattractive yield
CLP reported solid FY17 results during lunch time on 26 Feb, beating consensusby 4% on Australia and India. CLP declared in-line FY17 dividend of HKD2.9/sh（up 4% yoy）， indicating a payout ratio of 55% （based on recurring earnings） and adividend yield of 3.7% in 2017. With a rising outlook for the US treasury yield andCLP trading at only 0.97 ppt above US 10-year treasury yield （lower than historicalaverage of 1.71 ppt） on a 12-month forward basis, we believe CLP is fully valued.Maintain Hold.
Solid FY17 earnings with surprises from Australia and India
Stripping out one-offs （HKD573m of reversa of tax provision and HKD369m ofproperty revaluation）， recurring profit was up 8% yoy to HKD13.3bn, 4% aboveconsensus （6% above DBe）。 Major surprises were from Australia （+48% yoy） andIndia （+38% yoy）。 ACOI （Adjusted Current Operating Income） from the wholesalesbusiness in Australia in 2H17 rose by 145% HoH to HKD2.1bn （after strippingout the impacts from fair value changes）， driven by high wholesale prices andhigh availability factor. Earnings from India were stronger than expected onbetter operating efficiency and higher utilization of Jhajjar, steady performanceof Paguthan and lower interest cost. The company expects the availability ofJhajjar to exceed 80% by March 2018, recovering from an extended plannedmaintenance outage in 1H17. Hong Kong and HK-related business represented66% of CLP's operating earnings in 2017, followed by Australia （20%） andMainland China （9%）。 CLP incurred capex of HKD15.3bn in 2017 （up from 10.9bnin 2016） and free cashflow was HKD22.9bn in 2017 （flat compared to HKD22.5bnin 2016）。
Key takeaways from the briefing
Management mentioned that the Australia business has achieved its valuerestoration target: having its ROIC reaching its WACC for FY17. Managementbelieves that there is further upside for the Australia business in 2018 comparedto 2017, driven by Mount Piper. Long-term plan remains unchanged on the IPOof the Australia business, although there is no detailed timeline and the near-termfocus is stil on the value restoration.
Management plans to keep Mainland China and India to be CLP's major growth markets in the longer term. In India, CLP wil continue to focus on transmissionprojects, and is open to distribution projects if the government allows privateinvestment in the sector. The current power purchase agreement （PPA） forPaguthan wil expire in December 2018. Management does not expect the PPA to be extended in its current form beyond 2018. CLP is exploring various optionsincluding the prospect of merchant sales.
Management refused to provide dividend guidance for 2018/19 but highlightedthe company history of having sustainable and prudent dividend growth for mostof the time.