Morningstar | Power Assets Holdings' Interim Profit Gets a Lift from China Recovery, Our FVE Is Unchanged
Power Assets Holdings', or PAH's, first-half 2018 net profit grew 2.4% to HKD 4.12 billion, with a recovery in its China power plants and a full six-months contribution from its Duet Group assets, acquired in May 2017, helping to offset lower interest income from its pared down excess cash holdings. We raise our profit forecasts marginally but our fair value estimate remains at HKD 62. We think the stock is undervalued at its current share price. PAH's share price has dropped following the completion of a series of special dividend payouts in April 2018. Going forward, we expect PAH's dividend yield to normalize to 4.7%, which is still relatively attractive. The stock remains narrow-moat-rated based on above cost of capital returns at its U.K.- and Hong Kong-based utility assets.Performance from its core utility assets was decent with U.K. net profit up 6% year on year, China up 44%, and others (mainly Europe and Canada) up 12%, while Australia saw a 34% jump with the full six months contribution from Duet Group. Contribution from its investment in Hong Kong Electric was down 2%, in line with our expectation. We estimate full-year 2018 net profit of HKD 7,510 million, which represents a 10% decline from 2017 profit because of lower interest income from its excess cash and less favourable exchange rate gains.
A bid for Australian gas transmission utility APA Group is pending. As we think there is a decent chance for this acquisition to get approvals, we have already factored it into our earnings forecast, assuming that PAH takes a 20% stake in APA. We estimate contribution from APA adds 5% to PAH profit on a full-year basis. The cost works out to HKD 13 billion for PAH and would reduce the company's cash to HKD 8.3 billion for the full year. PAH has paid out around HKD 43 billion in special dividends in 2017 and 2018. So, PAH no longer has a significant level of excess cash leading to sharply lower interest income.
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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