Given our fair value Estimate for the Duet Group of AUD 2.10 per share and Cheung Kong Infrastructure Holdings’, or CKI's, takeover bid is at AUD 3.00, our preliminary view is that the value accretion to CKI would have to come primarily from lower debt costs. At this stage, CKI’s estimated cost of debt is 5.8%, 70 basis points lower than Duet’s. CKI may also be able to extract added returns through shareholder loans. Duet Group is studying the bid and it’s too early to rate the success of CKI’s takeover so we maintain our fair value estimate of HKD 70 for CKI. The move may have implications on our narrow moat rating for CKI given Duet’s no-moat status, but since we estimate Duet’s earnings will make up 11% of CKI’s 2017 forecast profit, and should not overwhelm excess returns from elsewhere, we expect CKI’s narrow moat status to be maintained.
If the takeover eventuates as proposed, the total price tag of AUD 7.5 billion (HKD 43 billion) may raise CKI’s net gearing to 0.32 times from 0.10 times assuming a 100% ownership of Duet. However, we suspect CKI is likely to eventually involve Power Assets Holdings Ltd (6 HK) into the acquisition. We estimate the latter has around HKD 58 billion in net cash. As such, we believe affording the takeover is not an issue and should not have negative implications for CKI’s projected dividends.
Analyst: Jennifer Song & Lorraine Tan, CFA
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