Recurring earnings down 8% yoy and 12% below our forecast
CKI’s 1H14 recurring earnings were HKD4,435m, 12% below DBe mainly due to lower-than-expected contributions from the UK. We believe CKI will remain active on acquisitions (e.g. the upcoming sale of the Swedish and Australian NSW power grids), and if that happens, it may choose to raise cash by selling some of its assets to PAH at fair value. The stock looks fully valued to us at current levels; Hold.
1H14 results review
CKI reported net profit of HK$24,119m in 1H14 (+367% yoy). Stripping out FX gain and disposal gain, recurring earnings were down 8% yoy to HK$4,435m. Recurring earnings were 12% below DBe, mainly due to lower-than-expected contributions from the UK (down 3% in GBP terms). Interim DPS was up 5% yoy to HK$0.53 and consolidated net debt to equity was up to 12% (from 9% at end-2013).
Outlook: yoy profit decline in 2H14E and lower regulated return in 2015E
Key things to watch for in 2H14 include: Ofgem and Ofwat’s final determination on the return of CKI’s UK regulated business; the progress of the Envestra takeover bid; and potential acquisitions (e.g. the sale of the Swedish electricity grid by Fortum and the privatization of grid assets by the NSW government). We expect much lower contributions from the UK in 2H14, as no more deferred tax gain will be booked (2H13: c.HK$1.9-2.0bn). We also expect lower returns from the UK/Australia after the regulated return resets in 2015.
Sum-of-the-parts valuation of HK$47.3; risks
We base our SOTP valuation primarily on DCF and various multiple-based approaches. 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 (see p.7-8 for more detail on valuation and risks).