Power Assets (PAH) announced its 1H16 results at midday on 28 July.Recurring earnings were down 17% yoy to HK$3,476m, dragged by a lowercontribution from HKEI following the share sale, higher holding co. levelexpenses and lower interest income. However, despite adverse currencymovement and regulatory resets, the contribution from UK and Australia arebetter-than-expected. Interim DPS was up 2.9% yoy to HK$0.7.
1H16 results review
PAH’s reported NP was up 7% yoy to HK$3,476m. Excl. one-offs booked in1H15 (HK$532m disposal loss on HKEI stake sales and HK$413m exp. onsettlement of Australian tax dispute), 1H16 recurring earnings dropped 17%yoy from HK$4,182m in 1H15. The decline is mainly dragged by 1) a lowercontribution from HKEI following a 16.5% stake disposal in HKEI (2638 HK,NR) in June 2015, 2) higher exp. at the holding co. level (vs. +ve numberbooked in 1H15 due to some litigation provision reversal) and lower bankinterest income amid low interest rate environment, 3) adverse FX movement(GBP, AUD) despite stable operating profits in local currencies.
Operating profits (excl. bank interest income/holding co. exp.) was down 5%yoy, largely in line. Australia business surprisingly came in better-thanexpected(+30% yoy on operating cost savings despite lower regulated returnafter reset for the two electricity distribution networks and weakening AU$).Op. profit from UK was down only 4% yoy despite GBP depreciation andregulatory reset for its electricity distribution network. As per PAH, fouroperating co. in the UK achieved satisfactory results via outperformingregulatory targets and cost reductions.
HK contribution was down 35% yoy due to a 16.3% stake disposal in HKEI andHKEI’s earnings drop on higher financing costs; Op. profit from MainlandChina was down 44% yoy on lower utilization of coal-fired units/wind yield.
Potential acquisition and FX movement the key things to watch
PAH had total net cash of HK$57bn as end-1H16. As per announcement dated12 May 2016, PAH resolved not to pay special dividend for now as to preservefinancial capability for M&As, incl. Project 1 (Husky’s oil pipeline assetscompleted on 15 July 2016), Project 2 (likely Ausgrid sized at >A$10bn as perBloomberg) and Project 3 (with comparable size to Project 2). Our TP(HK$72.5) incorporates HK$5.4 for value creation from potential M&As,assuming a total deal size of US$15bn in EV with a debt-to-equity ratio of70:30 and PAH taking a 40% stake. Success or failure in making valueaccretive acquisitions could pose upside/downside to our TP/earnings forecast.GBP currency movement is another thing to watch, given over 50% coreearnings contribution from UK. We currently assume GBP/USD to depreciatefrom 1.47 at end-15 to 1.28 at end-16E and stabilize at 1.28 in 17E. All elseequal, every10% depreciation in GBP from our base case would imply 5%downside risk to our FY16 earnings forecast for PAH.