EUR 850.00 For Business Accounts Only

Morningstar | Our FVEs on CK Hutchison, CK Infrastructure, and Power Assets Holdings Maintained

Following recent news, we are maintaining our fair value estimates on CK Hutchison, or CKH, at HKD 118, CK Infrastructure, or CKI, at HKD 68 and Power Assets Holdings or PAH at HKD 58, and believe all three are still relatively attractive although we have a preference for Best Idea CKH. Overall, we think the Economic Benefits Agreement, or EBA, is slightly positive for CKI and PAH and fairly neutral for CKH with no change to our moat ratings with CKI and PAH being narrow-moat and CKH with no moat. Although news that the group’s bid for Australian gas utility APA Group has cleared a key government hurdle lifted sentiment on the stocks yesterday, we think celebrations are unwarranted until the final--and more difficult--regulatory approval is obtained. Our preference for CKH is based on its potential for stronger midterm growth with efforts to revitalize its retail arm and full ownership of Wind Tre to lift cash flow.

The EBA between the three entities and CK Asset or CKA, lowers our 2018 profit estimate for CKH by 7% because of a one-off write-down for the infrastructure assets it directly owns but otherwise has little impact on forward earnings. We assume the EBA will be implemented by end September. We are treating the EBA as a short term investment by CKI and PAH and have assumed that earnings and cash flow reverts back to CKH after 2023. However, we would not be surprised that this is a stepping stone to a more permanent move that should see an outright sale by CKH of its direct interests in the infrastructure assets it co-owns with CKI.

We have factored APA’s potential contribution and cost into our earnings estimates for CKH, CKI and PAH but anticipate a fairly neutral impact on fair values due to the premium paid. To recap, the offer price is 33% above our fair value estimate for APA. Granted there may be upside on cost synergies that we have not assumed, but with the deal still subject to approval, the companies are not able to discuss plans.

CKI and PAH, together with CKA, still have to obtain approval from Australia's Foreign Investment Review Board for the acquisition of APA. Our Australian team believes that an approval is unlikely on security grounds especially after the recent change in government. However, as we view the APA purchase as being neutral to our fair value estimates, we have left our assumptions for the acquisition to be successful. If it does go through, the takeover should be completed by December.