Tuesday January 8, 09:30 AM
BROKER CALL - HK utilities CLP, Hong Kong Electric target prices raised - UBS
HONG KONG (XFN-ASIA) - UBS (Virt-X: UBSN.VX - news) has raised its target prices on CLP Holdings to 70 hkd from 64 and Hong Kong Electric
to 47 hkd from 45.6, citing a 'favorable outcome' for the new Scheme of Control (SOC) agreements.
The government said yesterday that it will cut the permitted rate of return for the two utilities to 9.99 pct from the current 13.5-15 pct under the new SOC agreements settled with the two power producers.
The cut will take effect from Oct 1 this year for CLP and on Jan 1, 2009 for Hongkong Electric. The term of the new agreements for both firms is 10 years, with an option to extend it for another five years.
UBS noted that the permitted rate of return is higher than the 9.5 pct it had assumed.
It also cited several other favorable changes in the new agreements.
The bank (TBHS - news) noted that the emission standards, the thresholds on penalties for missing efficiency targets and the five-yearly rate of return resets have been changed in favor of the power companies or dropped altogether.
However, UBS expects the new SOC agreements should still result in significant power tariff cuts in the future.
It forecasts an 11 pct decline in CLP's basic tariffs and a 17 pct decline for Hong Kong Electric.
After adjusting earnings forecasts, 'we think shares will perform better going forward,' UBS said.
The investment bank kept its 2008 earnings forecast for Hong Kong Electric unchanged but revised its 2009 forecast upwards by 4.4 pct, albeit without providing actual figures.
It slashed its 2008 earnings forecast for CLP by 5.0 pct while raising that for 2009 by 3.9 pct.
UBS said it now also assumed both companies will keep their dividend per share ratios in 2008 and 2009 unchanged compared with that of 2007 - with higher dividends as a result.
Shares of CLP today closed up 0.50 hkd or 1.14 pct at 57.85 today while those of Hongkong Electric were down 0.65 hkd or 1.47 pct at 43.65.
(1 usd = 7.80 hkd)
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