CK Infrastructure Holdings Ltd (SEHK: 1038) may not be a great dividend stock any longer. Here’s why. –
CK Infrastructure Holdings Ltd (SEHK: 1038), also known as CKI, announced in the 2019 annual report that the business may get affected by the global interest rate reduction. This comes on the back of fighting against the Covid-19 outbreak.
The infrastructure and energy investment firm remains solid, though. Credit rating agencies, such as S&P, affirmed CKI’s long term foreign-currency issuer default rating (IDR) and senior unsecured rating at A-.
This means CKI has maintained healthy financials to meet debt obligations to investors. However, can it still maintain its dividend?
Key positive business drivers
Looking at its business performance in 2019, CKI has maintained a relatively stable and predictable income of HK$2.56 billion (US$330.2 million) from a diverse portfolio of regulated utilities and infrastructure investments including Power Assets Holdings (SEHK: 6), UK Power Networks, Australian Gas Networks and Canadian Power.
The profits mainly came from its U.K and Australia portfolio and both take 59% of total profit. Although the profit from the UK dropped 12% on the negative impact of GBP/HKD depreciation, Power Assets and other utility businesses have not been impacted by the lockdowns across the globe.
This has been due to its already heavily-regulated business nature, thus offsetting the drop in UK revenue.
Solid credit quality but lower returns
Other than the strong cash hand of CKI, from HK$6.1 billion in 2018 to HK$12.1 billion in 2019, the group enjoyed a period of fast inorganic growth in the past few years due to the low interest rate environment.
It means lower cost of debt, which is a significant component of CKI’s operating costs. This also allows CKI to source cheap financing to acquire assets worldwide.
However, lower debt costs give various governments room to demand infrastructure businesses to lower their tariffs.
In turn, this reduces the revenue and rate of return, as evidenced in Northumbrian Water where the project return fell 12% to HK$4.6 million.
Regulatory pressure and less cash
The requirement of regulatory resets in Australia and the UK provide another reason why CKI’s share price dropped 30.2% to HK$38.65 so far in 2020 (see below).
Source: CKI Investor Presentation 2020
Regulatory reset is the process where infrastructure regulators require operators to resubmit their business, pricing, and compliance plans every five years. They are becoming more stringent across the regions.
Looking at the timeline above, CKI’s cash flow is likely to be weaken starting from Q1 2021 and may affect its ability to pay dividends, making it less attractive to dividend investors.
I believe CKI’s infrastructure investment portfolios will remain as one of the top-notch businesses when compared to its peers such as State Grid International Development in China and CLP Holdings (SEHK: 2). This is because of its stable income generated from its diversified portfolio of companies.
Although the business is fundamentally stable with strong financials, the external environment makes it tougher for CKI to pay out dividends to investors.
Overall, CKI no longer fits the criteria of a great dividend stock. It is turning to a lower yield and lower dividend payout ratio. Income-seeking investors should monitor this in the near future.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Hong Kong contributor Edmund R doesn’t own shares in any companies mentioned.
The Motley Fool Hong Kong Limited(www.fool.hk) 2020