Give a "buy" rating, discounted cash flow method to get the target price of HK $53.00. We expect earnings per share for 2023-2025 to be HK $2.76, HK $2.85 and HK $2.99 respectively. Our projected earnings growth is mainly driven by earnings growth contributed by HK Electric Investments and HK Electric Investments (02638 HK). The current share price of Power Assets (the "company") corresponds to a dividend yield of 7.0 per cent in 2023, which is about 3.0 percentage points higher than the yield on 10-year US Treasuries (nearly 1 standard deviation higher than the average spread over the past 10 years), indicating that Power Assets's share price has limited downside, especially given the prospect of future interest rate cuts.
Against the backdrop of rising financing costs and exchange rate fluctuations, the company recorded solid results in the first half of 2023. Power Assets recorded a profit of HK $2.959 billion in the first half of 2023 (a year-on-year increase of 3.1 per cent), in line with market expectations. Despite the uncertain macro environment, the company's utility business is mainly a stable regulated business, so its results in the first half of 2023 showed resilience. The interim dividend in the first half of 2023 was flat at HK $0.78, with a dividend yield of 56.2% (down 1.8 percentage points from a year earlier).
The UK and Hong Kong portfolios are defensive: although UKPN's permitted return has been cut since the second quarter of 2023 (the weighted average cost of capital fell from 4.8 per cent to 3.9 per cent), sterling is weak against the Hong Kong dollar, and funding costs rise, the company's UK portfolio recorded a profit of HK $1.398 billion (47.2 per cent of total profits) in the first half of 2023, down 2.4 per cent from a year earlier. The resilience of Power Assets's UK portfolio mainly comes from the anti-inflation mechanism of core utility-related businesses and the need for the UK to increase investment in the utility sector during the energy transition. In Hong Kong, the company made a profit of HK $328 million on its investment in HK Electric Investments and HK Electric Investments (02638 HK), up 10.1 per cent from a year earlier. HK Electric Investments and HK Electric Investments's business is largely unaffected by macro fluctuations, and its profits are expected to grow continuously over the next few years, driven by an increase in permitted capital expenditure.
M & An activity may restart: previously, global travel restrictions during the epidemic largely interfered with the company's M & An activity, which was the main means of earnings growth in the past. Now, as travel restrictions are lifted and corporate balance sheets become stronger, we think the company is interested in regaining this engine of growth.
Downside risks: lower than expected dividends; adverse regulatory changes; adverse exchange rate fluctuations.