Daiwa: CKI HOLDINGS' sale of UKPN offers excellent long-term returns, maintaining "Outperform the Market"

Daiwa published a research report stating that CKI Holdings (01038.HK), Power Assets (00006.HK), and Cheung Kong (01113.HK) announced the sale of their entire stake in UK Power Networks (UKPN) to the French utility company Engie, with the transaction equity value approximately £10.55 billion (about HKD 110.8 billion). CKI Holdings described this transaction as "too good to resist." Compared to when the Macquarie deal fell through in 2022, the regulatory asset value of UKPN has increased from about £7 billion to approximately £9.5 billion, mainly due to rising inflation and incentive measures.

As a result, management estimates that the proceeds from the current transaction will exceed £2 billion compared to what could have been obtained in 2022, and it is expected to bring in an internal rate of return on equity of over 16% over approximately 15 years and 8 months.

The firm expects that the aforementioned transaction will bring HKD 44 billion in proceeds to CKI Holdings, along with the HKD 9.5 billion cash from the earlier UK railway transaction, effectively turning CKI Holdings' projected net debt of HKD 11 billion in 2025 into net cash of about HKD 41 billion in 2026. Although it is likely to be in a net cash position, the firm expects that the dividend policies of CKI Holdings and Power Assets will not undergo significant changes, and considering the interest income generated from the cash recovered from UKPN disposals, it believes that their operating cash flow will remain roughly unchanged. The firm believes that the sale of the UK power grid is primarily aimed at realizing excellent long-term returns at reasonable multiples, seizing the opportunity of increased regulatory asset value post-inflation, and maximizing flexibility with a very strong cash position. A "Outperform" rating is given to CKI Holdings