Earnin g s on track, but potential headwinds may not be fully discounted
1H13 results of Power Assets (PAH) were up 10% yoy, marginally above our expectation after considering that no de ferred tax gain was booked for the UK business in 1H13. We still see scope that such deferred tax gain would be booked when UK finalizes the tax cut later this year but believe PAH’s earnings are likely to peak in 2013. We see headwinds from potential cut in regulatory asset returns, harsher enforcement by the taxation offices in the UK/Australia, as well as higher bond yields, and USD appreciation. Sell.
1H13 results marginally above DBe; interim DPS up 5% yoy to HKD0.65
PAH reported a net profit of HKD4,772m in 1H13, up 10% yoy and marginally above DBe. Growth was mainly driven by higher earnings from the UK such as full 1H contributions from Wales and West Utilities acquired in 2H12, and a lower overhead cost at headquarters. Interim DPS was up 5% yoy to HKD0.65 and consolidated net debt to equity was down to 27% (from 29% at end-2012).
Regulatory review will be the key focus in coming months
Regulated review in HK and regulated return reset for overseas assets would be the key focus for PAH in coming months. The SoC interim review and the 2014-18 SoC capex plan will be finalized before end-2013. We also expect more newsflow on the UK and Australia power businesses before the regulatory reset is finalized in 2014. The tax dispute with the Australia Taxation Office may suggest downside, though PAH is confident on winning the case.
Sum-of-the-parts valuation of HKD57 (from HKD56.8); risks
Our SoTP valuation is primarily based on DCF (assuming WACC of 5.0%) and various multiple-based approaches. Key upside risks include greater-than-expected investment in the SoC busine ss, value-accretive acquisitions, and a renewed spell of macro volatility (which may benefit defensive cos like PAH which derive >90% of their earnings fr om regulated-return utilities business).