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Power Assets:What’s the likely outcome of the upcoming AGM

发布时间:2016-05-04    研究机构:大和证券(香港)

Large special dividend unlikely with potential delay of Ausgrid deal

Recent Husky oil pipeline investment equivalent to HKD2.5/share

Maintain Hold (3); prefer CKI as more leveraged M&A play

What's new: We expect a limited special dividend to be recommended during Power Asset’s (PAH) AGM on 12 May. Given management has prioritised spending the company’s HKD63bn of idle cash on value-accretive M&A, we also see a high possibility that the board will ask for 2 more months to decide whether to declare a special dividend, subject to progress on the final bidding for Ausgrid.

What's the impact: According to the Australian Financial Review (29 April), the AUD10bn final bidding for Ausgrid could be delayed from July as Treasury approval could be on hold. Therefore, we believe that PAH’s board could either recommend a small special dividend (HKD2.5-5.0/share) or delay the special dividend until the 1H16 results (July/August) at the earliest, pending clarity on the progress of the Ausgrid bidding. As it stands, PAH and parent Cheung Kong Infrastructure (CKI) look to be among the final two bidders.

Husky investment equivalent to HKD2.5/share of cash. PAH and CKI recently announced the planned purchase of 65% of the Canada midstream oil pipeline assets of Husky for some CAD1.155bn. PAH will spend HKD5.3bn for a 48.75% stake; we expect the asset to provide 5%/0% earning/cash yield for 2016-20E, and over 10% earnings/cash yield after 2021 until the expiry of the offtake contract in 2035.

How big a special dividend is likely? If CKI/PAH win the bidding for Ausgrid, we estimate each would need to make equity investments of HKD13.9bn for 40% stakes in the combined 50.4% Ausgrid holding, where a HKD7.5-10.0/share special dividend from PAH would be sufficient for CKI to proceed without taking on more borrowing. However, we understand CKI can raise additional debt to proceed with M&A, with a net-debt-to-equity threshold at c.17% (currently: 8%), and therefore the capital requirement for M&A should not be the only factor taken into consideration by PAH in terms of whether to distribute a special dividend. If the bidding for Ausgrid is unsuccessful, we still think a HKD7.5-10/share special dividend, expected in 2H16, would partly mitigate concerns over the idle cash under PAH.

What we recommend: We maintain our Hold (3) rating and SOTP-based TP of HKD78.0. The key upside risk: a larger-than-expected special dividend. The key downside risks: a lower-than-expected special dividend, and a weaker-than-expected GBP (we estimate that 63% of PAH’s 2016E earnings would come from its UK business).

How we differ: We were the first to make the case for a CKI/PAH merger, and see a special dividend before a 2nd merger attempt in 4Q16-2017.

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