Upcoming 1H14 results should be a non-event; maintaining Sell
Power Assets (PAH)’s 1H14 reported earnings will be significantly boosted by a one-off disposal gain. However, 1H14 recurring should be down c.12% yoy and we expect lower reported earnings in 2H from the UK business due to the absence of a deferred tax gain. We also expect increasing concerns on lower HK SoC return when the government starts to launch the consultation on the future electricity market regulatory framework in 2H, and lower returns for PAH’s UK/Australia business after the regulatory resets in 2015; Sell.
1H14 results preview
PAH is due to announce its 1H14 results on 24 July (Thursday) at midday. Excluding the HK$52bn disposal gain, we expect recurring earnings to decline c.12% yoy to HK$4.2bn, mainly due to a lower earnings contribution from HK after the spin-off of Hongkong Electric in January 2014. We expect steady business performance from the overseas businesses (but higher/lower translational earnings from the UK/Australia due to currency fluctuations).
Outlook: lower profit in 2H14E and lower return after regulatory resets in 2015E
Key things to watch for in 2H include the outcome of the HK fuel mix consultation, Ofgen’s final determination on UK Power Networks, the progress of the takeover bid of Envestra, and potential acquisitions (e.g. the sale of Swedish electricity grid by Fortum and the privatization of grid assets by the NSW government). We expect contributions from the UK to be much lower in 2H14 as no more deferred tax gain will be booked (2H13: c.HK$1bn). We expect lower returns from the UK/Australia after the regulatory resets in 2015, and see rising market concerns on the HK business when the government launches its consultation on the future electricity market regulatory framework later in 2H.
Sum-of-the-parts valuation of HK$60.2; risks
Our SoTP valuation is primarily based on DCF (assuming WACC of 5.0%) and various multiple-based approaches. Key upside risks: acquisitions, better-than-expected regulated return, and a renewed spell of macro volatility .