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Morningstar | Lower Projections for CK Infrastructure and Power Assets Holdings, Both Still Look Cheap

After following up with CK Infrastructure, or CKI, and Power Assets Holdings, or PAH, management, we lower our post-2018 earnings outlook by around 5%-7% leading to a cut in our fair value estimates to HKD 68 from HKD 72 for CKI and to HKD 58 from HKD 62 for PAH. The reduction is largely due to the absence of contribution from the Zhuhai power plant after 2018 as the plant reverts to local government ownership. We also expect CKI to take a smaller stake in Australian gas utility APA Group should the acquisition progress. Our narrow moat ratings on both companies are unchanged. Both companies are trading at relatively attractive levels although we prefer CKI over PAH for its better growth potential.

CKI's share price has been notably weak partly on an overhang of share sales that we believe is nearing completion. Although we think there may still be near-term selling pressure, we believe the stock is attractive, trading at our bear-case valuation. While we have cut our post-2018 projections, the company has a few other acquisitions in the works that should provide upside to our numbers in 2019. However, with CKI's net gearing rising to our estimated 50% in 2018 and a need to conserve cash for acquisitions, we lower our forecast DPS growth for 2018-2020 to 1% from 5%. This may dampen investor sentiment on the stock which has been seeing average DPS growth of 8% over the past 10 years. We expect DPS growth to rebound to 5% from 2021.

PAH’s earnings likely peaked in 2017 and although interim profit was up 2%, we expect full year 2018 income to fall 9% on second half currency headwinds, reduced interest income and the absence of a one-off asset sale gain. Income will decline again in 2019 with contributions from Hong Kong Electric falling with the drop in regulated returns to 8% from 10%. We forecast ordinary dividends to grow 2% over the next three years but need to see contributions from APA Group bolster further growth.

We had originally assumed that CKI would take a direct 30% stake in the bid for APA Group with PAH at 20% and the remainder by CK Asset Holdings and possibly the Li Ka Shing Foundation. However, given that CKI is seeing other opportunities, we believe their direct stake will only be 20%. While the bid is still pending due diligence and requires various government approvals, the group is still targeting completion by year-end if the bid is formalized. Our fair value estimates already reflect the cost of the purchase. We also don’t rule out the potential for a new share issuance by CKI to raise cash. To avoid dilution to existing shareholders, we expect this will only occur if it is tied into an attractive accretive acquisition.