Hong Kong company reporting season

Li Ka-shing’s Power Assets posts higher interim profit due to disposal loss last year

PUBLISHED : Thursday, 28 July, 2016, 12:57pm
UPDATED : Thursday, 28 July, 2016, 1:47pm

Power Assets, an international utilities firm hurt by the British pound’s depreciation against the dollar, posted a 7.4 per cent year on year rise in net profit for the first six months as a loss from an asset sale pulled down profit in the year-earlier period.

The company, which invests in power and gas utilities in Britain, Holland, Portugal, mainland China, Hong Kong, Australia, New Zealand, Canada and Thailand, recorded a net profit of HK$3.48 billion in the year’s first-half.

That was up from HK$3.24 billion in the year-earlier period, which included a loss of HK$532 million from the sale of a minority stake in its Hong Kong utility unit HK Electric Investments.

Excluding the disposal loss, underlying profit has fallen in the first half of this year.

Revenue edged up 0.5 per cent to HK$629 million for the half, the company said in a filing to Hong Kong’s stock exchange after the morning trading session closed. An interim dividend of 70 HK cents per share was declared, up from 68 HK cents in the year-earlier period.

The firm, controlled by tycoon Li Ka-shing, will concentrate on “high quality investments in a diversified range of stable, well regulated energy markets” and is “currently in good progress on a few potential sizable investment,” chairman Canning Fok Kin-ning said in the filing.

Although the pound’s fall has seen earnings from Britain in Hong Kong dollar terms fall by 4.3 per cent to HK$2.23 billion, he said the profit had risen 2 per cent in local currency.

Profit from Australia grew 35.5 per cent to HK$561 million due to operating cost savings.

Profit contribution from its Hong Kong unit HK Electric Investments dropped 35.4 per cent to HK$367 million due to lower earnings and a stake sale.

Analysts contacted by the Post have not made interim profit forecasts on the firm, but some expected it to post a lower profit due to a smaller contribution from its Hong Kong unit, weakness of the pound, and lower permitted return rates in key businesses overseas.

For the whole of this year, 11 analysts polled by Thomson Reuters have an average net profit estimate of HK$7.7 billion on Power Assets, flat compared to last year.

Macquarie Securities analyst Alan Hon said Power Assets is exposed to volatility of the British pound, which has depreciated around 12 per cent since Britons voted in favour of leaving the European Union on June 26. It had been depreciating even before the referendum.

In this year’s first six months, the pound’s average value against the US dollar has fallen 6.7 per cent year on year to 1.43 for each dollar, according to data from Reuters.

In last year’s second-half, it averaged 1.53. The pound hovered between 1.29 and 1.35 against the dollar in the past month, and traded at around 1.32 Thursday morning.

Evan Li, HSBC’s head of Asia-Pacific utility and alternative energy research, last month estimated that Power Assets derived 62 per cent of its earnings from Britain last year, and that its profit for the whole of this year could fall 6 to 8 per cent if the pound dropped to US$1.25 against the dollar on a sustained basis.

Uncertainties abound as to when the British government may make a formal request to the EU for the nation to leave the 28-nation economic and political bloc, and how its impending departure may affect its economy and currency.

Besides the pound’s value, UBS head of Asian utilities research Simon Powell said Power Assets was also affected by the “full effect” of permitted return rates reductions in its companies in Britain, Australia and New Zealand, after they took effect in the middle or just after the end of last year’s first-half.

They included 40 per cent-held UK Power Networks, a power distributor in eastern and southeastern England, which saw its baseline permitted return on equity drop to 6 per cent from 7 per cent since April last year, according to a UBS report.

Its 27.9 per cent-owned South Australia Power Networks also had its allowed return on equity reduce to 8 per cent from 11 per cent since mid last year, while that of 50 per cent-owned Wellington Electricity in New Zealand was also cut since April last year.

Its 33.4 per cent-owned HK Electric Investments Tuesday reported a 8.6 per cent fall in net profit to HK$1.1 billion for the year’s first-half due to higher finance costs on higher bank borrowings. Power Assets sold a 16.5 per cent stake in the Hong Kong unit mid last year.

Fok in March this year hinted at a possible special dividend payout by Power Assets, which had a cash pile of HK$68.15 billion at the end of last year largely due to a stake sale through a separate listing of its Hong Kong utility arm HK Electric Investments, in early 2014.

Fok had told shareholders last year it would consider paying a special dividend if it fails to find investment opportunities two years after the separate listing.

But the firm said in May this year its board had decided against a special interim dividend

citing potential investment in three projects, including a “very substantial” one yet to be revealed, adding it “may reconsider the matter pending further developments”.

It said at the time the projects included a C$865.38 million (HK$5.1 billion) investment in the oil pipeline and storage assets of sister firm Husky Energy, a Canada-based oil and gas producer, as well as “a very substantial project involving an investment amount much larger than” the pipeline and storage assets.

Power Assets is part of a consortium led by parent Cheung Kong Infrastructure (CKI) in a bid against a consortium led by state-backed monopoly power distributor State Grid Corporation of China to buy a 50.4 per cent stake in Ausgrid, the largest electricity distributor in New South Wales state of Australia, estimated by some to be worth about A$10 billion (HK$58 billion), Australian media have reported. The firms have not responded when asked to comment on their bids, which are reportedly being examined by the state government this week.

Powell said one other potential investment target for Power Assets and CKI is Britain’s National Grid, which is in the process of selling a majority stake in its gas distribution business and indicated a target to complete the sale by early next year.

Power Assets share price closed the morning trading session 0.33 per cent lower at HK$75.05 ahead of the results. The Hang Seng index dropped 0.43 per cent.