CKI 2022 Profit Misses Mainly on Noncash Adjustments

On first glance CKI Holdings’ 01038 2022 earnings disappointed as U.K. contributions fell short of expectations. However, the deviation is mainly due to HKD 1.3 billion in mark-to-market losses on its inflation hedges. Given our more benign inflation assumptions for full year 2023 coupled with reduced currency headwinds, we expect CKI’s earnings to grow 14.5% year on year in 2023 to HKD 8,870 million. Much of its ex-U.K. contributions were in line although associate Power Assets Holdings, or PAH, also fell short due to the impact of the inflation hedges as well. We made minimal changes to our assumptions and leave our fair value estimate, or FVE, unchanged at HKD 58 pending additional tweaks when full accounts are released. Dividends grew at 1.2% year on year in 2022, in line with our expectation. At the current share price level, CKI’s dividend yield is a decent 5.8% and we expect dividends to continue to grow at the 1%-2% annual pace.

CKI indicates that its U.K. assets deploy inflation swaps on 30% of its regulated revenue to offset inflation swings. These swaps are marked-to-market and the jump in inflation in 2022 has led to sizable write-downs in value. However, as inflation pressures subside, we expect the value of these swaps to normalize. The markdowns have no impact on CKI’s cash flow. In the absence of these markdowns and any other one-off items, we nonetheless assume a 2% year-on-year decline in its core U.K. contributions in 2023 mainly due to the regulatory reset at U.K. Power Networks, or UKPN, which starts in April. However, there is upside potential if UKPN’s regulated asset value is revised higher based on the inflation benchmark.

With healthy cash flow, net gearing ratio continued to ease to just 8% at year-end 2022 from 17% in 2021. Understandably, the market is looking at CKI to make some acquisitions. However, we think pricing is not at a level that meets the group’s hurdle rates. Hence, the lack of growth may continue to disappoint investors.