• Last of the series of special dividends
• Regulatory risks persist
• FV of HK$55.33

Swansong for Special Dividends

Power Assets Holdings Limited (PAH; stock code: 6 HK) has paid out a special dividend of HK$6/share last month, following HK$12.50 of special dividends in 2017. While still in a net cash position, we believe that the probability of PAH doing an encore of special dividends would likely be extremely low in the near future, given that its once-significant cash pile (2015: HK$68.2b) should have dropped to ~HK$8.3b by end-FY18, according to our estimates.

In our opinion, this also speaks to the low probability of PAH making substantial acquisitions in the near future. This is in-line with our thesis that within the Cheung Kong group, CK Infrastructure and CK Asset Holdings would probably feature more prominently in future acquisitions, with PAH taking on a relatively diminished role.

Regulatory Risks Still Lurking

As mentioned in our previous report, we highlighted the risk of Ofgem trimming the return on equity for network companies for the next regulatory period starting 2021. We think this continues to be a concern among investors, which is further accentuated by fears of possible nationalisation of local distribution networks under a Labour government.

On the back of these concerns, we trim our terminal growth rate for U.K. Power Networks and Northern Gas Networks by 25 bps. At this juncture, we refrain from incorporating more punitive assumptions, as we balance the risks against the fact that the next regulatory period is still some time away, as well as the U.K. elections not due until 2022.

Yield Spread Not the Most Attractive

All things equal, we continue to believe that yield-plays will remain challenging in a rising rate environment. As of 17 May 2018, PAH’s yield spread over the US Government 10-year is at 1.22 ppts, which is ~-0.4 S.D. below its 5-year average.

Incorporating adjustments to our terminal growth assumptions, as well as the special dividend payout of HK$6/share, our fair value estimate drops from HK$64.99 to HK$55.33.

Source: OCBC Research - 18 May 2018