Expectation seems high, while potential headwind may not be fully discounted
FY12 results were 2% above our estimate but DPS was 6% below consensus. While we expect further acquisitions and factor in a 5% acquisition premium into our target price, it seems that the market has already priced-in such upside, but failed to consider some potential uncertainties and headwinds (e.g. short-term earnings boost by deferred tax gain and tax loss credit, regulatory return reset in 2015, taxation issues, currency fluctuations, etc). With dividend yield close to the historical low, we see limited upside at current levels; Hold.
FY12 earnings largely in-line; DPS up 8% yoy but below expectation
CKI’s FY12 net profit was up 22% yoy to HK$9.4bn (EPS up 16% yoy to HK$3.93 due to two share placements in 2012). Stripping out one-offs, earnings were 2% above our estimates and up 21% yoy to HK$9.2bn, driven largely by a full-year earnings contribution from UK Water and better performance from the UK power and gas networks. DPS was 6% below consensus and up only 8% yoy to HK$1.66. Net debt to equity was at c.6% at end-2012, suggesting room for further acquisitions.
Some uncertainties and headwinds to watch for
We note that CKI’s UK earnings include deferred tax gains arising from the UK corporate tax cut (c.7% of 2011 and 2012 earnings) and the utilization of tax loss credit from Hutchison, which will last till 2014-15. The Australia Taxation Office’s position on certain shareholder loan interest may also be problematic. The non-cash marked-to-market derivatives loss from Wales & West Utilities may continue if inflation stays high and be realized at some point.
Sum-of-the-parts valuation of HK$49.0; risks
Our SoTP valuation is based primarily on DCF and various multiple-based approaches, and includes a 5% acquisition premium. Key up/downside risks: acquisitions, regulatory return reset of its overseas regulated assets and taxation issues, currency fluctuations, a worsening/improving macroeconomic outlook, and lower/higher RPI inflation in the UK (p.6).