In-line interim results . Power Assets Holdings (PAH) posted 2013 interim net profit of HK$4,772mn (+10.1% YoY). The results were in-line with our expectations (of HK$4.610mn) and acco unted for 46.1% of our original full-year 2013E earnings forecast of HK$10,351mn. EPS came in at HK$2.24(+10.3% YoY) while an interim dividend of HK$0.65/share (+4.8% YoY) was declared, translating into a payout ratio of 29%.
Overseas operations accounted for over 63% of 1H13 earnings. After years of acquisitions abroad, overseas operations have become an increasingly influential earnings cont ributor in 1H13. Contribution from operations outside Hong K ong accounted for 63.4% (+3.9ppts YoY) of PAH’s total net earnings in 1H13, due to increased earnings from operations outside Hong Kong (+17.3% YoY to HK$3.026mn) and softened earnings from Hong Kong operations (-0.5% YoY to HK$1,746mn).
Regulatory and legal update. (i) The Interim Review of the Scheme of Control Agreement (SOC) and the Development Plan for 2014-18 (i.e. CAPEX for the coming 5 years) are still in progress or discuss ion with the HK Government. Completion is expected by the end of this year; and (ii) PAH has made payment of A$63mn to the Australian Tax Office (ATO) in 2012, which accounted for 50% of the total A $126mn tax dispute with the ATO. PAH is of the view that no amount shoul d be payable to the ATO, and the A$63mnpaid is recoverable. So far, PAH has not been served with any claim by the ATO, but PAH has made it clear that it will vigorously defend its position.
Reiterate OVERWEIGHT. After reviewing the interim results and on theassumption of the acquisition of AVR (energy-from-waste JV) In Netherlandwill be completed by Dec 2013E, we have fine-tuned our 2013-15E earnings forecasts by –0.3%/-0.1%/+0.3%, respec tively. Meanwhile, PAH’s share pricehas declined 17% from its recent high (of HK$80.40) to a low (of HK$66.50) in 2Q13, mainly on fears of potential QE tapering by the US Fed. We believe that interest rate movement will not deteriorate the fundamentals of PAH, thus PAH remains our best pick among all local utilities judging by its: (i) strong cash base and low gearing; (ii) value accretive M&A opportunities; (iii) dividend increment potential; and (iv) a non-eventful SOC Interim Review. All told, we reiterate our OVERWEIGHT rating and unchanged TP of HK$77.40.