Market should not be too excited about the headline results
CKI’s FY13 headline results were 10% ab ove consensus but this was mainly driven by a one-off disposal, FX and deferred tax gains. The market should not be too excited on the headline numbers, as the c.HK$2.0bn deferred tax gain from CKI's UK business in 2013 (including the indirect share from holdings via Power Assets, "PAH") is unlikely to recur in 2014 and there are risks of a return cut for its US/Australia business after the regulatory return reset in 2015. We remain cautious on CKI, as regulatory uncertainties and a rising bond yield environment are likely to continue to weigh on the share price.
Recurring EPS was up 12%, driven by higher contributions from the UK
CKI’s FY13 net profit was up 23% yoy to HK$11.6bn. Stripping out one-offs, recurring earnings were up 12% yoy to c.HK$9.5bn, driven largely by new overseas projects and high single-digit organic earnings growth from the UK. DPS was up 12% yoy to HK$1.86. Net debt-t o-equity was slightly up to c.9% at end-2013 (look-through gearing of c.80% on our estimates).
Key things to watch for: regulatory reset for overseas business and acquisitions The allowed return for overseas assets should be the key thing to watch for in 2014. This may result in a lower allowed return, though the overall incentive package (e.g., expenditure savings) would be another important element for these regulated business to achieve an actual return higher than the allowed return (closer to double digits for efficient companies). Acquisitions would be a catalyst and we have factored a 5% acquisition premium into our valuation.
Sum-of-the-parts valuation; risks
We base our SoTP valuation primarily on DCF and various multiple-based approaches (note that we base our forecasts and valuation on the published numbers before the announcement of the spin-off of HK Electric by PAH). Key up/downside risks relate to: acquisitions, regulatory return reset, taxation issues, currency and bond yield movement, and lower/higher RPI inflation in the UK (p.6).