EUR 850.00 For Business Accounts Only

Morningstar | Little Impact to our FVE from APA Deal Rejection, CK Infrastructure and Power Assets Still Cheap

While the bid cleared competition watchdog hurdles, Australia’s Treasurer has indicated he is likely to block the CK Infrastructure, CK Asset, and Power Assets Holdings joint-bid for gas transmission company APA Group. The final decision will be made in two weeks and unless the group 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, we have a neutral view on the acquisition to CK Infrastructure, or CKI, and Power Assets, or PAH, because we think the purchase is expensive, limiting the potential accretion to both CKI’s and PAH’s cash flow with earnings impact at around 2%. The market is sharing this same view given the limited reaction to the news. We leave our fair value estimates unchanged for now at HKD 68 for CKI and HKD 58 for PAH. Both companies are trading at a relatively attractive level but we note that slowing U.K. growth and currency headwind risks remain an overhang.

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 also think that it probably puts a lid on CKI’s further forays into Australia because it doesn’t make sense to go for much smaller assets and as this marks the group’s second rejection on security grounds, the time and cost spent to make a deal and then have it rejected is likely to sour management enthusiasm. In addition, the group will not sit back to dilute their control in an acquisition so bringing on local partners is not likely. We think CKI still has room to make other acquisitions and see a greater probability that they will be Europe-based.