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Morningstar | Little Impact to our FVE from APA Deal Rejection, CK Asset Shares Attractively Priced

While the bid cleared competition watchdog hurdles, Australia’s Treasurer has indicated he is likely to block a consortium of CK Asset, or CKA, CK Infrastructure Holdings, or CKI, and Power Assets Holdings, or PAH, from acquiring gas transmission company APA Group. The final decision will be made in two weeks and unless the consortium is able to provide assurances or tweak the deal to appease security concerns that too many of the key gas pipelines are in foreign hands, the rejection is a sure thing. As mentioned previously, the transaction’s impact to the company’s valuation is minimal given the regulatory uncertainties as well as the expensive purchase price limiting the potential accretion opportunities. The market is sharing this same view given the limited reaction to the news.

We maintain our narrow moat rating and our fair value estimate of HKD 81 for CKA. The company’s shares have retreated more than 20% since the beginning of the year, underperforming the market. This is likely due to concerns over elevated Hong Kong property market and rising U.S. rates. We believe the company has prudently managed its risk exposure through continued capital recycling and diversification efforts.

This rejection from the Foreign Investment Review Board on security grounds is, in our view, not surprising. There had been local concerns that it would have put too many of Australia’s gas transmission pipelines in the hands of a foreign group. We think this is in line with the more cautious and nationalistic mood of the Australian government over the past few years. We believe the company still has room to make other acquisitions in the infrastructure sector and see a greater probability that they will be Europe-based.