CKI Earnings: Lower 2023 Profit Growth but Swing to Currency Tailwind Lifts Outlook

CKI Holdings’ 01038 first-half 2023 net profit of HKD 4.24 billion, down 3.9% year on year, is slightly short of our original forecast, leading to a reduction in our full-year 2023 net profit estimate by 6% to HKD 8.28 billion. Our projections for other years are little changed, and our fair value estimate stays at HKD 58. We now see EPS growing 6.9% this year and 11.1% in 2024. We expect a better second-half profit, helped by currency tailwinds and the potential reduction of mark-to-market inflation hedge costs. Interim dividend was raised 1.4%, within expectation. We continue to like CKI, believe the company is well-poised and should see opportunities to make an acquisition over the next 18 months. The shares currently trade at a 44% discount to our fair value estimate, 12 times 2023 price/earnings and 6.4% dividend yield.

U.K. contributions fell 5.2% year on year with UK Power Networks’, or UKPN’s, allowed returns declining with this year being the first of its five-year reset, continued losses at Wales & West Utilities, and a decline to loss at Northumbrian Water. We think U.K. contribution growth should resume in 2024, assuming stable currencies, with UKPN’s investment plan, inflation benefits to allowed returns, and as mark-to-market inflation hedges costs reverse. The latter is a reason for the losses at Wales & West and Northumbrian Water. The gearing level of UKPN at 55% is below the statutory norm of 65%, leaving the utility with buffer to add debt to fund its capital expenditure. With debt passed through, we think there could be room for UKPN to see higher income contribution to CKI.

CKI has historically traded higher on acquisition growth, but opportunities have been limited in the past five years. We now expect CKI to benefit from a healthy financial position (net gearing is at 18% inclusive of perpetual securities as of end-June 2023) in a high interest-rate environment amid slow growth where highly geared assets are likely available for sale.