CLP: Raising Our 2023 Earnings Estimate but Lowering Longer-Term Margin

We remain buyers of CLP Holdings 00002 after adjusting our earnings forecast assumptions to reflect reduced losses for its Australian coal-fired power generation activities in 2023 and a lowered long-term operating margin. The net impact is a decline in our fair value estimate to HKD 63 from HKD 66, which prices CLP at 1.4 times 2023 price/book and 9.3 times EV/EBITDA, well within its 10-year range. We think the hiccups in 2022 are largely behind CLP, with wholesale prices in Australia and global fuel costs declining. This should allow CLP to grow its dividend payout by 2%-3% annually.

CLP’s first interim dividend is unchanged from the year-ago level at HKD 0.63. This tends to imply an unchanged dividend for the full year, but we keep our projection for a 2% increase to HKD 3.16 for 2023. Given a better outlook for its Australian operations in 2023, we do not expect CLP to have to inject more capital into EnergyAustralia. But we still expect reinvestment needs to be relatively high in 2023 as it completes its current Scheme of Control five-year development plan. We estimate capital expenditure to be around HKD 15 billion in 2023, similar to 2022′s level, before declining to HKD 13.1 billion in 2024. We assume spending growth of 3% in the next five-year plan (2024-28), but with inflation currently higher, the value of the next plan could exceed our forecast. This could lift our growth trajectory for CLP.

We factor in a more benign operating environment for EnergyAustralia in 2023, but we believe the Australian operation remains a swing factor in CLP’s earnings. In 2019 and 2020, Australia made up around 13%-14% of CLP’s recurring net profit before head office costs. Our base case sees a gradual recovery to make up 8% of recurring profit in 2025, as we still see some risk to a full normalization in output for its aging Yallourn power plant. We factor in a midcycle operating margin of 16.5%, down from 18%, which is on the lower end of its historical range.