EUR 850.00 For Business Accounts Only

Morningstar | CK Infrastructure and Power Assets Formalize APA Bid; Our FVEs Unchanged

CK Infrastructure, or CKI; Power Assets, or PAH; and CK Asset Holdings’ joint bid for Australian gas transmission and distribution company APA Group is now nonbinding, although it is still subject to both shareholder and regulatory approvals for the AUD 13 billion purchase. APA’s board has recommended that shareholders accept the takeover. We have already reflected the potential earnings contribution from APA in our profit forecasts, assuming that CKI and PAH each take a 20% stake in APA and the acquisition is complete by November 2018. As such, our fair value estimates are unchanged at HKD 68 for CKI and HKD 58 for PAH. Both companies are undervalued presently, but we have a preference for CKI for its better growth potential. We do not expect the addition of APA to affect our narrow moat ratings on CKI and PAH.

We think APA would be a solid addition to the group’s portfolio of utility assets. At this stage, we still factor in a 50% chance of completion in our fair value estimate for APA, but to be cautious, we have already earmarked the cash out of both CKI and PAH. The hindrances to completion are mainly regulatory. There is concern that the acquisition would limit competition in the gas transmission sector, although CKI says it will divest APA’s Western Australia pipelines to appease concerns. In addition, the government is assessing whether there would be security risks if the pipelines are owned by CKI, a foreign entity. We believe the regulatory outcome may take another two to three months.

With the regulated return for Hong Kong power generation and sales declining to 8% in 2019 from 10%, and given lower interest income as it has paid out much of its excess cash, we expect PAH to see slightly negative to flat earnings over the next few years, even with the addition of a stake in APA. In contrast, we are looking at an average 3% annual EPS growth for CKI, with lower contribution from PAH offset by recently acquired assets such as Ista.