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Morningstar | CK Infrastructure's Slower Growth Outlook with Fewer Acquisitions and Regulatory Resets Pending

CK Infrastructure functions almost like an infrastructure trust where it owns a portfolio of regulated utilities and other infrastructure related activities with stable income streams. The company receives dividends from their assets and builds up cash to make periodic acquisitions of similar assets. So, low-mid single digit organic earnings growth is lifted by income contribution from acquisitions. Because of its stable cash flow stream, the company has been able to keep annual dividend growth of 4.1% over the past three years although we expect this to slow to 3% over the next five years. We anticipate some challenges over the next five years with its Australian and United Kingdom regulated utilities coming to the end of their current regulated returns and facing reviews or resets for the next period of returns. With low interest rates, slow economic growth and with governments under pressure to keep their jobs, we expect added pressure on allowed returns. This, and the relatively weak British pound and Australian dollar, are the key drivers to our softer dividend growth projections. The company’s last significant acquisitions were of CK Williams, formerly DUET Group, a gas transmission and distribution network in Australia, and Ista, a German electric meter reading company. Both of these were in 2017. CKI’s bid for Australian utility APA Group was rejected by authorities in 2018. The company may consider spinning off its U.K. utilities into a separate listing if market appetite permits. Without the spin-off we think CKI is more inclined to preserve its cash so that its net gearing can decline. As a result, it is likely to be more cautious in its acquisitions and we expect CK Asset Holdings to take the driver’s seat in their joint bids. CKI seeks stable cash flow businesses where it can eke out efficiencies to help bolster returns. This includes lower debt cost, additional returns from the provision of shareholders’ loans to some investee companies, and shared management resources in markets where it owns multiple assets. Management strictly adheres to targeting acquisitions where it believes it can achieve an internal rate of return on equity of around 9%.