Power Assets Holdings Earnings: Improving Currency and Inflation Factors To Lift Outlook

With first-half performance tracking our full-year estimate, we make minimal change to our earnings forecast for Power Asset Holdings 00006, or PAH, maintaining our fair value estimate at HKD 48. We think the market may be disappointed that PAH’s first-half 2023 earnings of HKD 2.96 billion is up a subdued 3% year on year, but we expect a stronger second-half performance with currency tailwinds to help. We maintain our view that 2023 net profit will be around HKD 6.0 billion leading to EPS growth of 6.9%. Interim dividend is unchanged, as expected. We think PAH remains relatively attractive, trading at around a 19% discount to our fair value estimate and on a forward dividend yield of 7%.

U.K. contributions fell 2.4% year on year with U.K. Power Networks’, or UKPN’s, allowed returns declining with this year being the first of its five-year reset and continued losses at Wales & West Utilities. We think U.K. contribution growth should resume in 2024, assuming stable currencies, with UKPN’s investment plan, inflation benefits to allowed returns, and as mark-to-market inflation hedges costs reverse. Gearing level of UKPN at 55% is below the statutory norm of 65%, leaving the utility with buffer to add debt to fund its capital expenditure. With debt passed through, we think there could be room for UKPN to see higher income contribution to PAH.

Australian contribution was shy of our estimate reflecting the absence of a one-off asset disposal gain that lifted first-half 2022 earnings as well as a larger-than-expected impact from Australian Gas Networks’ regulatory reset given timing shift. We lower our assumptions for 2023 contribution from its Australian businesses but leave other years largely unchanged.

We leave our Hong Kong assumptions unchanged. HK Electric contribution grew 10%, but the uptick is generally within our expectation. This is the final year of the 2019-23 Development Plan so the capital expenditure balance is expected to be relatively high this first half.