Spin-off of HK business suggests valuation has peaked, in our view
PAH announced on 27 Sept. after market close that it intended to spin-off its core Hong Kong electricity business (HKE) under a trust arrangement and only maintained a 30-49.9% stake in HKE after the spin-off. We see limited room for value unlocking (our SOTP valuation im plies a 12x 2013E EV/EBITDA for HKE) and we believe the spin-off confirms our view that the market valuation of the HK business has already peaked. We al so see risks of a holding company discount for PAH after its core business has been spun-off; Sell.
Our SOTP valuation already implied a 12x 2013E EV/EBITDA for HKE
We believe current share price of PAH (c.15% above our target price) has already reflected a full valuation for HKE. We see anemic earnings growth for HKE and believe a success of the spin-off would require a balance of (i) the dividend yield offered; (ii) the regulato ry uncertainty and a potential step-down in the HK SoC return after 2018; and (iii) the market’s expectation of the nearly ending low interest rate environment (despite a delay in the Fed’s tapering). Too early to get excited on acquisitions but a holding company discount likely PAH can potentially raise HK$40bn by spinning off HKE (not including the HK$13-23bn cash from a further gear up of HKE to the target debt level of HK$40-50bn). The company plans to use the proceeds for future acquisitions but it seems too early to get excited on any potential upside at this stage.
However, in the near term, we believe a holding company discount is justified for PAH following the disposal of the core HK SoC business.
SOTP valuation of HK$57/share suggests >15% downside potential; risks Our target price is based on sum-of-the-parts valuation, which mainly comprises the HK SoC business. Upside risks include a successful spin-off of the HK SoC business at a higher-than- expected valuation, acquisitions given the company’s solid track record in this area, greater-than -expected capex for the HK SoC business, and lower bond yields