Citi has published a research report indicating that POWER ASSETS (00006) delivered strong first-half earnings, boosted by disposal gains. However, during the results briefing, management provided more conservative guidance on special dividends than the market had anticipated, leading the bank to lower its target price. After factoring in return resets, higher interest income, and a diminished catalyst for special dividends, Citi raised its 2026-2028 earnings forecasts for POWER ASSETS by 7% to 11%. Yet, due to the tempered expectations for special dividends, it increased the weighted average cost of capital, resulting in a target price reduction of 5% from HK$70 to HK$66.5. The bank maintains a "Buy" rating, citing upside potential from potential mergers and acquisitions (M&A) and a dividend yield of 4.9%.

The report notes that POWER ASSETS' first-half net profit surged 383% year-on-year to HK$14.704 billion, which includes approximately HK$11.686 billion in disposal gains from the sale of UKPN and UK Rails. Excluding these items and the core earnings contribution from UKPN, the company's core earnings from existing assets rose 24% year-on-year to HK$2.228 billion. This growth was primarily driven by higher returns from regulated utility assets in the UK and Australia, as well as increased interest income from the proceeds of asset sales.

Citi highlights that POWER ASSETS held a net cash position of approximately HK$42.5 billion at the end of the first half, equivalent to HK$19.94 per share. During the results briefing, management indicated a preference for using cash for M&A rather than paying special dividends, expressing concern that distributing special dividends would significantly reduce the company's share capital base. Drawing parallels with its sister company, which spun off HK Electric Investments (02638) in 2015 and only began paying special dividends from 2017 to 2018, Citi expects POWER ASSETS may take two to three years to identify M&A opportunities, with the earliest special dividend potentially not materializing until 2028-2029. On the acquisition front, parent company Cheung Kong Infrastructure (01038) was reported last year as a leading candidate to bid for UK Thames Water, but the latter has recently favored debt restructuring with existing creditors, making a near-term deal unlikely in Citi's view. Additionally, Cheung Kong Infrastructure is reportedly planning to sell EDL Energy for between A$2 billion and A$3 billion. If the transaction proceeds, the bank estimates a disposal gain of approximately A$500 million to A$1 billion.