EUR 850.00 For Business Accounts Only

Morningstar | CK Infrastructure Holdings Interim Profit Largely in Line, FVE Lowered on Foreign Exchange Headwinds. See Updated Analyst Note from 26 Jul 2018

With the strength in the U.S. dollar-pegged Hong Kong dollar against other currencies, notably the British pound and Australian dollar, we lower CK Infrastructure's, or CKI's, fair value estimate to HKD 72 from HKD 75. The weaker translated income ate into the company's first half profit, with earnings growing at 5% year over year, which otherwise would have been stronger in local currency terms. Nonetheless, there is little change to our profit forecast as we include the contribution from the Australian gas utility APA Group, which we think CKI is likely to formalize a bid for. We think CKI is relatively attractive at the current price point but note that growth will have to be driven by acquisitions. The bid for APA, priced at AUD 13 billion, is not cheap and has not been looked at as favourably by the market but we also think that worries over lower returns on its assets are also more than reflected in CKI's share price.

CKI's interim net profit of HKD 5.9 billion saw growth led notably by the first full six months contributions from Duet Group in Australia, Germany's Ista and Reliance Home Comfort in Canada. This helped offset flat performances in its contribution from Power Assets Holdings, and its U.K. assets, marred somewhat by currency headwinds, while New Zealand profits disappointed, declining 24% year over year. Overall, first-half profit makes up 52% of our current full-year 2018 earnings estimate.

We're expecting U.K. contributions to pick up in the second half driven by expanded capacity at U.K. Rails. However, we see a risk that the new trains may see deployment on a more gradual basis than we assume over the next two years in which case, our profit forecast could be cut by 1.5%, which is not significant. On a positive note, there is no midterm review of its U.K. electricity distribution returns, so revenue from these assets will be stable to March 2023.