Company Reports

CKI Holdings’ and Power Assets Holdings’, or PAH, purchase of the holding company of Northern Ireland gas distributor Pheonix Natural Gas Ltd, or PNGL, for GBP 312.6 million is decent, in our view, but should only lift annual earnings by around 1% for CKI and PAH. Our fair value estimates for both companies are unchanged, remaining at HKD 53.30 per share for CKI and HKD 48.60 per share for PAH. Both companies are trading in 4-star territory, but we prefer CKI as we expect dividend growth versus PAH’s flat dividends. CKI is yielding 5.9% at the current share price and PAH at 6.3%.

No-moat CKI's 2023 results were mixed. While net profit of HKD 8.0 billion was in line with our estimate, it was helped by an HKD 572 million currency gain, and without this, core profit was 6.8% below our expectation. On the positive front, it appears its two more significant asset groups—the UK and Australian power and gas utilities—are performing well. Associate Power Assets' contributions were also in line. However, we make some tweaks to our earnings assumptions, leading to a 6.2% reduction in our 2024 profit forecast. This mainly reflects lower margin and revenue projections for its Hong Kong materials, Dutch waste-to-energy, and UK Rails assets. Our fair value estimate is only slightly lowered to HKD 53.30 from HKD 54.00. CKI's dividend per share was as estimated at HKD 2.56, and we continue to expect CKI to grow its dividends by 1.2% annually.

CK Infrastructure functions almost like an infrastructure trust where it owns a portfolio of regulated utilities and other infrastructure-related activities with stable income streams. The company receives dividends from its assets and builds up cash to make periodic acquisitions of similar assets. Low- to mid-single-digit organic earnings growth is lifted by income contribution from acquisitions.

CKI Holdings has been outperforming the Hang Seng Index since end-October 2023, as we believe its defensive attributes and the declining 10-year bond yields leave the group’s current 5.5% dividend yield looking more attractive. Cuts in U.S. interest rates also improve prospects for a stronger GBP and AUD versus the HKD, which lead to higher translated earnings. In addition, CKI’s earnings should look markedly better in 2024 on the potential reversal of its mark-to-market inflation hedge charges and the absence of any regulatory resets.

CK Infrastructure functions almost like an infrastructure trust where it owns a portfolio of regulated utilities and other infrastructure-related activities with stable income streams. The company receives dividends from its assets and builds up cash to make periodic acquisitions of similar assets. Low- to mid-single-digit organic earnings growth is lifted by income contribution from acquisitions.

CKI Holdings’ first-half 2023 net profit of HKD 4.24 billion, down 3.9% year on year, is slightly short of our original forecast, leading to a reduction in our full-year 2023 net profit estimate by 6% to HKD 8.28 billion. Our projections for other years are little changed, and our fair value estimate stays at HKD 58. We now see EPS growing 6.9% this year and 11.1% in 2024. We expect a better second-half profit, helped by currency tailwinds and the potential reduction of mark-to-market inflation hedge costs. Interim dividend was raised 1.4%, within expectation. We continue to like CKI, believe the company is well-poised and should see opportunities to make an acquisition over the next 18 months. The shares currently trade at a 44% discount to our fair value estimate, 12 times 2023 price/earnings and 6.4% dividend yield.

On first glance CKI Holdings' 2022 earnings disappointed as U.K. contributions fell short of expectations. However, the deviation is mainly due to HKD 1.3 billion in mark-to-market losses on its inflation hedges. Given our more benign inflation assumptions for full year 2023 coupled with reduced currency headwinds, we expect CKI's earnings to grow 14.5% year on year in 2023 to HKD 8,870 million. Much of its ex-U.K. contributions were in line although associate Power Assets Holdings, or PAH, also fell short due to the impact of the inflation hedges as well. We made minimal changes to our assumptions and leave our fair value estimate, or FVE, unchanged at HKD 58 pending additional tweaks when full accounts are released. Dividends grew at 1.2% year on year in 2022, in line with our expectation. At the current share price level, CKI's dividend yield is a decent 5.8% and we expect dividends to continue to grow at the 1%-2% annual pace.

CK Infrastructure functions almost like an infrastructure trust where it owns a portfolio of regulated utilities and other infrastructure-related activities with stable income streams. The company receives dividends from its assets and builds up cash to make periodic acquisitions of similar assets. Low- to mid-single-digit organic earnings growth is lifted by income contribution from acquisitions.

We see CK Infrastructure's, or CKI's, share price selloff of 22% since August 2022 to be unwarranted with the company's exposure to geopolitical, inflation, and interest-rate risks well-contained. Our forecast dividends are unchanged following an update with management. However, we factor in a lower British pound, Australian dollar, and euro exchange rates versus the Hong Kong dollar leading to a cut in our fair value estimate to HKD 58 from HKD 61.

CK Infrastructure functions almost like an infrastructure trust where it owns a portfolio of regulated utilities and other infrastructure-related activities with stable income streams. The company receives dividends from its assets and builds up cash to make periodic acquisitions of similar assets. Low- to mid-single-digit organic earnings growth is lifted by income contribution from acquisitions.

On the whole, CK Infrastructure's first-half results were within our expectations, with 46.4% year-on-year growth in net profit driven by the absence of a deferred tax charge that hurt year-ago profit. However, we have lowered our profit estimates by 4%-5% for 2023-26 to reflect stronger currency headwinds, leading to a reduction in our fair value estimate to HKD 61 per share from HKD 62. Mark-to-market inflation hedges at 39% owned Wales & West Utilities led to a loss at the utility, but as this is a non-cash-flow item, there is no impact to CKI’s cash flow. This will be more than offset by our estimate of a HKD 0.9 billion gain from the sale of a stake in Northumbrian Water. So, our 2022 profit forecast is little changed. We continue to like CKI and see continued growth in its dividends by 1%-2% annually. At its HKD 48.70 share price, CKI is yielding 5.2%, which provides support, and we think the company is well positioned to afford a decent acquisition in 2023 if opportunities arise.

CK Infrastructure functions almost like an infrastructure trust where it owns a portfolio of regulated utilities and other infrastructure-related activities with stable income streams. The company receives dividends from its assets and builds up cash to make periodic acquisitions of similar assets. Low- to mid-single-digit organic earnings growth is lifted by income contribution from acquisitions.

The Cheung Kong group is selling 25% of Northumbrian Water for around a 47% premium to the estimated year-end regulated asset value, or RAV, of GBP 4.75 billion. This is above our base-case valuation for the asset but in line with recent premiums and leads to a nice gain of around HKD 0.9 billion for CKI Holdings. The sale will leave CK Infrastructure, or CKI, with a holding of 39% in Northumbrian Water, down from 52%, Power Assets Holdings with 6% from 8%, and similar pro rata reductions for CK Asset Holdings to 27% and CK Hutchison Holdings to 3%. We believe the selling price is fair for a minority stake. We leave our fair value estimate unchanged at HKD 62 and see value in CKI. Outside of the one-off gain, there is minimal impact to CKI’s earnings outlook.

A Financial Times article has highlighted CKI Holdings' lapsed deal to sell its stake in British electricity distribution network UK Power Networks, or UKPN, but we have a neutral view on the deal and our fair value estimate on CKI is unchanged at HKD 62. According to the article, the offer from a KKR-led consortium priced UKPN at GBP 15 billion, which would have presented a nice gain to CKI, who purchased its stake at an enterprise value of GBP 5.8 billion. However, we understand CKI is not keen to sell, given the recent inflation adjustments in the U.K. that lead to a revision in UKPN's regulated asset value, or RAV, to at least GBP 7.9 billion as of May, from GBP 6.2 billion that we use in our valuation estimate. The reason for our neutral view is that we believe it would be difficult for CKI to find another regulated utility asset of equivalent size, quality and potential capital expansion outlook for the next 10 years. In short, we think the bird in hand currently is as good as the two in the bush and CKI management believes it's worth more than two.

We refresh our cash flow model to reflect CKI's and Power Assets', or PAH's, publication of their 2021 annual reports with the full cash flow statements. There is minimal change to our earnings estimates and our fair value estimates remain at HKD 62 for CKI and HKD 53 for PAH. Share prices of both CKI and PAH have outperformed the Hang Seng Index year to date, which we believe is due to their defensive attributes. Both CKI and PAH are able to pass on higher costs to customers as the bulk of earnings are regulated. We note U.K. gas and electricity regulator Ofgem raised the price cap on utility bills by 54% as of April 1. We currently have a preference for CKI over PAH given better upside to its fair value but we note that CKI has slightly greater sensitivity to currency headwinds.

For CK Infrastructure Holdings, or CKI, and its associate Power Assets Holdings, or PAH, 2021 results were slightly shy of our expectations. CKI’s recurring net profit of HKD 9.1 billion was around 5% below our estimate due mainly to higher costs. We have tweaked our estimates but changes are minimal. We expect the upcoming April inflation adjustments to its regulated asset values, or RAVs, to buffer inflation impact.

CK Infrastructure, or CKI, functions almost like an infrastructure trust where it owns a portfolio of regulated utilities and other infrastructure related activities with stable income streams. The company receives dividends from their assets and builds up cash to make periodic acquisitions of similar assets. So, low-mid single digit organic earnings growth is lifted by income contribution from acquisitions.

CK Infrastructure Holdings is seeing muted positive reaction to news that it may be selling its 40% stake in UK Power Networks, or UKPN, for a potentially hefty gain. CKI has confirmed that the group is in discussions with potential bidders but has not indicated whether the Bloomberg report that the sale could value UKPN at GBP 15 billion, which is more than double what we reflect in our valuation of CKI, is accurate. Given the recent transaction values, a pricing that is at least 1.6 times the regulated asset value, or RAV, would not be surprising, but GBP 15 billion would appear to be well above this benchmark. The news, nonetheless, supports our view that CKI is trading below our fair value estimate of HKD 60 per share as it implies possibly higher valuations for its other U.K. assets.

CK Infrastructure, or CKI, functions almost like an infrastructure trust where it owns a portfolio of regulated utilities and other infrastructure related activities with stable income streams. The company receives dividends from their assets and builds up cash to make periodic acquisitions of similar assets. So, low-mid single digit organic earnings growth is lifted by income contribution from acquisitions.

CK Infrastructure functions almost like an infrastructure trust where it owns a portfolio of regulated utilities and other infrastructure related activities with stable income streams. The company receives dividends from their assets and builds up cash to make periodic acquisitions of similar assets. So, low-mid single digit organic earnings growth is lifted by income contribution from acquisitions.