Even more cash after HKEI disposal; maintain Hold on balanced risk rewardPAH announced in midday 9 June 2015 that it sold 16.53% stakes in HKEI(2638.HK, NR) to Qatar Holding LLC (Qatar) at HK$5.26/share for a cashconsideration of HK$7,681m. After the disposal, PAH has c.HK$60bn net cash,or c.HK$28 per share. We think it is difficult for PAH to fully utilize its richfinancial capacity on acquisitions any time soon. If no major acquisition isdelivered in 2015, PAH could come under pressure to distribute some of itscash in hand through a special dividend. While yield stocks have been underpressure lately ahead of a potential US rate hike, we maintain Hold rating forPAH with balanced risk reward, as the current share price is close to ourvaluation for existing business of HK$69.8/share, while potential valueaccretiveacquisitions (as early as Q315) could serve as positive catalysts.PAH intended to maintain stake of 30-49.9% in HKEI at IPO
PAH now holds c.33.37% stakes in HKEI after the disposal. Managementexplains that the disposal is in line with PAH’s intention to hold stake in HKEIat between 30% and 49.9% stated at the HKEI IPO. The proceeds received willbe used to support PAH’s future global acquisitions. CKI also sold its entirec.3.4% stake in HKEI to Qatar, according to the management. So Qatar nowowns 19.9% stake in HKEI as a strategic investor.c.HK$455m one-off disposal loss in 2015; recurring earnings downside 3-7%The disposal price of HK$5.26/share is at a 0.4% discount to the closing priceof 8 June and is only 2.7% lower than our valuation for HKEI (which in turnaccounts for 16% of our SOTP target price for PAH). So the impact on ourtarget price for PAH is negligible. However, with reduced earnings contributionfrom HKEI, we estimate the disposal implies c.3% downside to our 2015recurring earnings and 6-7% from 2016 onward. PAH estimated a one-offdisposal loss of c.HK$455m in 2015.
Even more cash on hand for acquisition; NSW privatisation as early as 3Q15Management expects the bid for TransGrid, an electricity transmission networkoperator in NSW Australia, in 3Q15. We estimate PAH’s cash balance afterHKEI disposal could support acquisitions with an EV deal size of c.US$70bn (orUS$8.4bn equity investment, assuming 70% debt finance and PAH taking a40% stake). The cash seems too big to be fully utilized any time soon, even ifPAH win the bid for TransGrid (RAB of A$6.1bn as at 30 June 2015, accordingto AER’s estimate). We think the possibility of a special dividend is rising.
SOTP target price of HK$77.0; HoldOur target price includes HK$69.8 for existing assets and HK$7.2 for valuecreation from blue-sky M&As, assuming a total deal size of US$20bn in EV anda 40% stake for PAH. Key downside/upside risks: failure/success in makingvalue-accretive acquisitions, higher/lower bond yield and currency moves.