Potential headwinds may not be fully discounted
CKI's 1H13 recurring earnings were up 7% yoy (recurring EPS up 4% yoy),slightly above our expectation after considering that no deferred tax gain wasbooked for the UK business in 1H13. We see headwinds from a potential cut inregulatory asset returns and harsher enfo rcement by the taxation offices in theUK/Australia, as well as higher bond yields and USD appreciation. However,acquisitions remain a cata lyst for CKI and we believe the market is going toview them positively; maintaining Hold.
1H13 recurring earnings up 7% yoy (EPS +3% yoy); interim DPS of HKD0.5
CKI reported a net profit of HKD5,169m in 1H13 (+10% yoy), mainly driven byhigher earnings from the UK and a lower overhead cost at PAH but partlyoffset by lower profits from mainland China and Cana da. Stripping out FX gain,recurring earnings were up 7% yoy to HKD4,814m (recurring EPS up 4% dueto share dilution). Interim DPS was up 25% yoy to HKD0.5 and consolidatednet debt to equity was up to 9% (from 6% at end-2012).
Acquisitions remain a catalyst and earnings driver
Contributions from the UK remain solid with growth mainly driven bycontributions from Wales & West Utilities acquired in 2H12 (marked-to-marketloss will no longer be booked starting 2013), despite there being no deferredtax gain recognized in 1H13 (vs. 1H12), and Northern Gas Networks reportedlower earnings after the return reset in April 2013. We believe CKI will continueto look for acquisition opportunities.
Sum-of-the-parts valuation of HKD45.8; risks
Our SoTP valuation is primarily based on DCF and various multiple-basedapproaches, and includes a 5% acquisition premium. Key risks include theability/failure to secure value-accretive acquisitions, a change in the regulatoryregime for its regulated assets, lower/hi gher RPI inflation and higher/lower UKreal bond yields, and a worsening/improving macroeconomic outlook .