Morningstar | CLP Divests 40% of India Operation; No Impact on FVE of HKD 84
Narrow-moat CLP will divest a 40% stake in its India operation to Quebec pension fund CDPQ for INR 26.4 billion (HKD 2.7 billion, or around 1% of market cap). The India operation consists of two thermal power plants and renewable generation assets in solar and wind. The partial divestment was not surprising, given some of the challenges in the India market. Overcapacity in the electricity market more than offset the increase in demand, though conditions improved last year. Operationally, difficulty in acquiring good-quality coal for Jhajjar and gas at favourable prices for its Paguthan plants have been challenges in recent years. The Paguthan plant has yet to renew its power purchase agreement, which is expiring at the end of this year.Excluding the impact of the currency, the divestment is at book value and we estimate an enterprise value/EBITDA multiple of close to 5.7 times. Proceeds from the deal will be reinvested into the business, as CLP remains committed to India. As previously noted, the company is open to acquisitions of transmission and distribution assets, and the focus is also on renewable energy assets. This is reflected in the completion of the Veltoor solar plant last year, and investment in renewable is a shared focus with new partner CDPQ. The divestment does not alter our fair value estimate of HKD 84 for CLP, and we see the deal as prudent in derisking from a geography that has higher uncertainty relative to its remaining operation. Our 2-star rating is based purely on valuation grounds. We still see the utility as high-quality, well-managed, and operating in a stable regulatory regime for its core Hong Kong operation, which underpins the company’s strong free cash flow.
CLP Holdings is an investment holding company. Through its subsidiaries, Co. operates five geographical regions, Hong Kong, Mainland China, India, Southeast Asia and Taiwan, and Australia. In Hong Kong, Co. generates, distributes and provides electricity supply. In china, Co. produces power with a focus on clean and low-carbon energy, including nuclear and renewables. In India, Co. has a diversified generation portfolio comprising coal, gas and renewable energy. In Southeast Asia and Taiwan, Co. has interests in Taiwan's Ho-Ping Power Station and Lopburi solar project in Thailand. In Australia, Co.'s asset portfolio includes coal, gas and wind generation and gas storage facilities.
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