Macquarie has maintained its 'outperform' rating on China Resources Power after it announced an agreement to sell its 10 per cent stake in Huaneng International Power Development for $2.4 billion, and has increased the target price on the stock to $6.20.
The broker says the selling price translates into 1.85 times the net asset value held by CR Power, much higher than expectations. CR Power will book a disposable gain of $1.12 billion in 2005, which lifts the broker's earnings forecast by 58 per cent. Concerns over the issue of new shares after a strong share-price performance should be alleviated by CR Power's 2005 net gearing being lowered by 17 percentage points.
Although the disposal of the stake will reduce CR Power's earnings by about $250 million next year (11 per cent of the broker's estimate), because HIPDC has a low dividend payout ratio of 23 per cent, the reduction in cash inflow is estimated to be only $57 million. Therefore, it would be better for CR Power to use the proceeds to repay bank borrowing, saving $120 million in interest payments a year.
CR Power is eyeing its parents' two projects at Fuyang and Yunpeng power plants, with total capacity of 777 MW. If CR Power acquires these projects its capacity will increase by 12 per cent next year and should offset the lower earnings after the HIPDC disposal. The broker has reduced its earnings forecast by 6 per cent for next year.
The counter closed on Friday at $4.95.