Report
Lorraine Tan
EUR 850.00 For Business Accounts Only

Morningstar | CKI’s Management Is Cautious on Regulatory Resets, Results in Line, FVE Unchanged

CK Infrastructure’s and Power Assets Holdings’, or CKI's and PAH's, respectively, management team shared a cautious outlook on the risk of upcoming regulatory resets that could lead to lower returns for its U.K. and Australian utilities. Following a preliminary review of both companies’ 2018 results and the risk of lower midcycle returns, we believe concerns are largely reflected in both companies’ current share prices. We maintain CKI’s fair value estimate at HKD 68 and we would want a larger buffer before buying CKI. We see better upside potential in parent company CK Hutchison Holdings, or CKHH.

CKI faces returns resets starting with Northumbrian Water in the U.K. and South Australia Power Networks in 2020 followed by seven of its other Australian and U.K. utility assets through 2021. While the management team, in previous resets, has been confident of maintaining its target returns, it is warning governments are keen to squeeze the benchmark cost of equity which would lower allowed returns. We think this uncertainty may weigh on further share price gains. However, its regulated asset values should continue to rise in the low- to mid-single-digit pace which should help offset the potential cut in regulated tariffs. We think a narrow moat rating is sustainable but we will review CKI’s moat trend.

Over the next five years, we think CKI will average EPS growth of 5.5% with full-year contribution from the Economics Benefit Agreement with CKHH to give a lift in 2019 and expanded Husky Energy and U.K. Rails capacities helping to lift growth in its regulated utilities. The regulated returns are likely to ramp up as they close out the current reset periods. 2018 performance was largely within expectation although U.K. contributions were softer than we expected in the second half. This was offset by healthy profit in continental Europe and lower interest expense than we originally forecast. We make little change to our assumptions and factor in dividend growth of 3%.

The group is still looking into spinning off its European utilities into a separate listing but given Brexit uncertainties, delays are likely. We think investors’ risk appetites for stable and safe returns will continue to be robust, particularly with the outlook that interest rates will remain subdued, and this may actually keep market interest in regulated assets keen.
Underlying
CK Infrastructure Holdings Limited

CK Infrastructure Holdings and its subsidiaries are engaged in the development, investment and operation of infrastructure businesses in Hong Kong, Mainland China, the U.K., the Netherlands, Australia, New Zealand and Canada. Through its subsidiaries, Co. is engaged in investment holding; production and laying of asphalt; manufacturing, sale and distribution of cement and property investment; financing; treasury; and waste management servicce. Through its principal associates, Co. is engaged in investment in power and utility-related businesses, and electricity distribution.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Lorraine Tan

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