Power Assets' FVE Lowered on Foreign Exchange Headwinds; Share Price Fall Overdone

Power Assets Holdings', or PAH’s, share price fall of 19% since end-August is unwarranted in our view, given the company’s free cash flow is largely shielded from recession risks, rising costs, and interest rates. The group only reports on a half-yearly basis, but our recent check with management indicates that business is stable with free cash flow still healthy. The bulk of its earnings come from regulated power assets that enjoy a cost passthrough. Currency headwinds, however, will lead to lower Hong Kong dollar-translated income, but we are confident that PAH is able to maintain its full-year dividend of HKD 2.82 per share, representing an attractive 7.4% yield. In addition, PAH is buying back its shares with plans to acquire up to 5.5% of its float annually. This should provide support in the face of selling pressure. At the current HKD 38 share price level, shares are trading at around a 22% discount to our fair value estimate, which we have cut to HKD 49 from HKD 53 to account for the lower translated values.