Relatively defensive during times of uncertainty
• Muted impact from rising US rates so far; has annual inflation adjustments for UK assets
• Supported by dividend yield
• Monitor regulatory resets; waiting for M&A announcements to support growth
Holding up vs. the market since last report in January this year – Since our last HOLD-rated report on 24 January 2022, the stock of CK Infrastructure (CKI) delivered a total return of 2% compared to the Hang Seng Index’s -12% total return as of 24 June 2022 close, outperforming the broader market by 14% and illustrating CKI’s relative defensiveness during a period of broader market weakness.
Impact from rising rates, inflation, fuel costs – While yield plays’ stock performances are traditionally dragged by rising interest rates, we have seen limited impact from US rates hikes on CKI’s share price so far, which is down by less than 3% YTD (based on 24 June closing). This comes as the US 10-year Treasury yield has already spiked by more than 150bps YTD. We believe that investors may be looking out for relatively defensive names such as CKI in the face of market volatility, supporting share price performance. Meanwhile, CKI’s assets in the UK are regulated and have annual inflation adjustments, and with regards to rising fuel costs, there is fuel-cost pass through for the Hong Kong business.
Waiting for M&A – Looking ahead, growth for the group will still mainly depend on acquisitions, for
which there is still some lack of clarity. On a positive note, the pace could pick up with the global re-opening post Covid-19. We fine-tune our estimates and our fair value estimate rises slightly from HKD 50 to HKD 51. Risks include disappointment in operations of its overseas businesses, continued lack of acquisition opportunities and unfavourable GBP/AUD currency movements.
ESG updates
On the ESG front, the group has a rating which has remained constant since June 2018. There is room for improvement in several aspects, such as Governance, Carbon Emissions, Water Stress and Human Capital Development, all of which are below industry average. The bulk of CKI’s operations are related to energy networks, which results in a lower carbon and pollutant footprint relative to fossil fuel-based power providers. Although CKI cut its thermal-based capacity from 2,350 MW to 2,080 MW, GHG intensity of 0.61 tCO2/MWh in FY2020 remained higher than industry average 0.40tCO2/MWh, as of May 2020. HOLD. (Research Team)