Power Assets’ 2022 Profit Misses; FVE Lowered Slightly to HKD 48

We lower Power Assets Holdings’ 00006, or PAH’s, fair value estimate to HKD 48 from HKD 49 due in part to the weakness in associate HK Electric’s, or HKE’s, market value. Although on first glance, 2022 results disappointed, this was mainly due to mark-to-market inflation hedges that dampened United Kingdom-derived contributions. As a result, our cash flow assumptions are largely unchanged pending additional tweaks on the release of its full accounts. We continue to forecast unchanged dividends at PAH of HKD 2.82 annually in our explicit forecast period. PAH currently trades at a relatively attractive 6.5% dividend yield, which we think will continue to support its share price.

We expect more benign currency headwinds in 2023 and, with the absence of one-off items, should see PAH’s 2023 net profit grow 6.5% year on year. In terms of core profit, we expect its U.K. contributions to decline 2.5% year on year mainly due to the U.K. Power Networks reset that starts in April. We continue to see U.K. contributions making up around 44% of group profit. Australian contributions were stable, rising 4.6% year on year in 2022. This is a bit slower from the first-half pace, which we think can be attributed to higher fuel costs.

HKE’s distributable income was held unchanged given scheme of control returns that allows HKE to access transfers from the fuel clause account to offset the higher fuel costs. Dividend was flat, which is in line with our assumptions. We continue to expect that this will be unchanged. As a result, we expect PAH’s dividends to also stay flat.