Analyst Note| Lorraine Tan, CFA |
Given that we had cut our earnings forecast three weeks back, we tweak mainly our 2020 net profit estimate lower by 10.7% to HKD 6.91 billion, following CK Infrastructure Holdings', or CKI's, weak interim results release. The sharp 52% drop in first half net profit to HKD 2.86 billion is largely driven by a one-off deferred tax charge of HKD 1.10 billion at its U.K. assets, which had been pre-warned, but the company also made more substantive cost buffers than we had assumed. However, since the shortfall in allowed returns should be clawed back in the next two years, our fair value estimate is only lowered to HKD 61 from HKD 62 to reflect a reduction in our valuation of 36% owned Power Assets Holdings, or PAH. This impacts our sum-of-parts derived fair value estimate of CKI. Both CKI's and PAH's interim dividends are as expected and we see no risk to our dividend forecasts. We think CKI is attractive with a dividend yield in excess of 6%, reflecting risks from reduced allowed returns as its U.K. regulated assets face regulatory resets these four years.