PAH recorded 4% growth in 2015 normalised profit, 7% higherthan our estimate
Good performance in UK and Australia offset by FX headwind
Maintain Buy rating with unchanged TP of HKD83
2015 results summary: PAH reported 2015 attributable profit of HKD7.73bn vsHKD61.1bn in 2014 which included a gain of HKD53bn from the spin-off of HK Electric inJanuary 2014. Stripping out one-off FX losses and HKD532m of loss from the disposal ofa 16.5% stake in HK Electric in June 2015, recurring earnings for 2015 were up 4% yoy,which is 7% above consensus and our expectation. Profit is driven by good performancein the UK, due to favourable deferred tax adjustments as a result of a reduction in thecorporate tax rate, as well as the full year contribution from Australian Gas Networksacquired in August 2014. However, this was offset by the reduction of interest in HKElectric from 49.9% to 33.37% and the headwinds from weaker GBP and AUD during2015. PAH announced a final dividend of HKD2.02, bringing its total dividend for 2015 toHKD2.70, vs HKD2.68 in 2014. The company did not announce a special dividend even ifit has HKD68bn of cash on the balance sheet. Our forecast does not account for anyspecial dividend. We believe the next opportunity for a special dividend to be consideredcould be at the AGM in May 2016 or interim results (July-August 2016).
Investment Thesis: PAH has a similar footprint to its parent CKI, as the two companiesfrequently co-invest in projects. As of 2015, PAH had a cash position of HKD68bn, twicewhat it paid for UK Power Networks in 2011. Now since the merger with CKI is off thetable, we believe PAH will continue to seek acquisition opportunities, in the absence ofwhich they otherwise would consider a special dividend to shareholders. Either way,these would be positive catalysts.
We maintain our Buy rating and target price of HKD83. PAH’s premium PB-over-ROEto peers is justified by its net cash position (primarily denominated in HKD), which alsomakes it beneficial from potential hike in US policy rates. Its 2016e EV/EBITDA of 13x(including associates) is also undemanding (peers: 10-16x).
Valuation: Our DCF-based target price of HKD83 is driven by a 5.1% WACC, 6.0%cost of equity and 3.5% cost of debt. PAH has de-rated and its 1.3x 2016e PB isbelow its 10-year historical mean of 1.7x. Downside risks include (1) weakening GBPand AUD, which will lower income from overseas businesses; (2) worse-thanexpectedoutcome of the next tariff resets for businesses in Australia in 2015-16; (3)lower-than-expected permitted return under the SOC in Hong Kong; (4) Sooner-thanexpectedrate hikes by the US Fed.