Morningstar | Minor Adjustments to Power Assets on Foreign Exchange Tweaks; Our FVE Remains Unchanged. See Updated Analyst Note from 28 Jun 2019
We make minor tweaks to our profit forecast for Power Assets Holdings on slightly higher joint-venture profit partly offset by a stronger Hong Kong dollar versus the British pound and Australian dollar. But most assumptions are largely unchanged ahead of mid-year results that should be released by the end of July. Our fair value estimate remains at HKD 52. Notably, we are on the low end of Street expectations with consensus target price at HKD 58, but our free cash flow reflects a dip from 2024 on the expiry of its Economic Benefits Agreement, or EBA, with CK Hutchison Holdings. There is also the risk of lower U.K. distribution assets' allowed returns, particularly from 2024. However, we don't see either factor dampening the current dividend of HKD 2.80 per share, which supports an attractive dividend yield of 5%. We see EPS averaging 2.5% growth.We continue to treat the EBA as a short-term investment for PAH, but we think there is a good chance that CK Hutchison may make the arrangement permanent by selling the assets to current holders of the EBA. Power Assets has a 22% share in the EBA presently with the other shareholders being parent CK Infrastructure and related company CK Asset Holdings. The other alternative is for the group to spin off the U.K. infrastructure assets into a separate listing provided that the market environment is conducive. While this complicates the returns from the EBA, Power Assets could still see benefit from the spin-off of direct stakes that it owns in some of its U.K. utility assets.
Unlike prior years, we believe 2019 will be relatively quiet in terms of acquisition activity. Without any acquisitions or sales of assets, we believe the company's share price should be relatively stable with support from a sustainable dividend. However, to reflect the risk of lower cash flows post 2023, we have changed our dividend forecast assumption to a flat expectation of HKD 2.80 per share from our prior view for a 2% annual rise.
Power Assets is an investment holding company. Through its subsidiaries, Co. is engaged in investment in power and utility-related businesses. Co. has interests in electricity generation, transmission and distribution, renewable energy and gas distribution. Co. operated three segments: Sales of electricity, which supplies electricity in Hong Kong; Investments, which invests in power and utility-related businesses and is segregated further into four reportable segments (U.K., Australia, Mainland China and Others) on a geographical basis; and all other activities, which represents other activities carried out by Co.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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