Maintain "Buy" with a DCF-derived TP of HK$53.00. We forecast 2023-2025 EPS of HK$2.76, HK$2.85 and HK$2.99, respectively, largely driven by growing earnings contribution from HKEI (02638 HK). PAH's (the "Company") current share price implies a 2023F yield of 7.0%, which is around 3.0 ppts higher than the yield of 10-year US treasury note and represents a spread that is nearly 1+SD larger than its historical average over the past decade - this implies limited downside to PAH's share prices, especially considering the prospect of future rate cuts.
Solid 1H23 results amid rising financing costs and FX volatility. PAH recorded 1H23 earnings of HK$2,959 mn (+3.1% yoy), in line with market expectations. Despite macro uncertainties, PAH's 1H23 results demonstrated resilience, as the Company's utility businesses are predominantly operated under regulated regimes. 1H23 interim dividend was flat yoy at HK$0.78 with a payout ratio of 56.2% (down 1.8 ppts yoy).
UK and HK portfolios look defensive: In 1H23, PAH's portfolio in the UK recorded earnings contribution of HK$1,398 mn (47.2% of total earnings), down slightly by 2.4% yoy, despite lower allowed return for UKPN from 2Q23 onwards (WACC down from 4.8% to 3.9%), weakening GBP against HKD, and rising financing costs. The resilience in PAH's UK portfolio is largely derived from the inflation-proof mechanisms of the underlying utility businesses and the UK's need to increase investment in the utility sector amid energy transition. In HK, PAH's earnings from its investment in HKEI (02638 HK) grew 10.1% yoy to HK$328 mn. HKEI's business is largely insulated from macro uncertainties with a growing earnings outlook driven by the increases in allowed capex over the next few years.
M&A could resume: Previously, restricted travelling across the globe amid COVID-19 largely disturbed PHA's M&A activities, a major means for growth.
Now with lifted travel restrictions and a more sound financial position, we believe PAH is interested in picking up such growth engine.
Downside risks: lower-than-expected dividend; unfavourable regulatory changes; unfavourable FX movements.