Despite a record of relatively stable earnings generated by Hawaiian Electric Industries, Inc.'s (HE) regulated electric operations, new plant installations and the company's growing banking operations, HE's ongoing litigation with the Hawaiian Department of Health, increasing O&M [operations & maintenance] expenses, a volatile interest rate environment, and uncertainties prevailing over the sustainable strength of the Japanese economy collectively continue to weigh on the stock's valuation.
On the other hand, a late grant of 2007 interim rate relief will help curb higher O&M costs and ongoing capital expenditures in 2008. As of this report, HE common stock trades at 15.8x and 14.4x, respectively, our 2008 and 2009 earnings per share estimates, or approximately in-line with its diversified energy utility industry peers. Meanwhile, the stock also trades in-line relative to price-to-book value multiples yet at the lower-end of the range of its utility industry peers on the basis of relative sales and cash flow multiples.
Although perfectly comparable public companies do not exist for HE, given its electric business and unique banking operations, the case for a market-neutral rating is supported by a very high dividend yield and the existence of inconsistent market-based valuation parameters. Given the company's established near-monopoly market position within the interest rate-sensitive utility and banking industries, the best investment case for HE may be the company's above-industry average and very competitive 5.1% dividend yield.
However, we also recognize the existing risks associated with the outcome of regulatory disputes and adverse movement of yield curve. The recent approval of a rate increase by the PUC for HELCO further improves the utility's outlook.
Therefore, with a mixed outlook, helped by a strong balance sheet and above-average dividend yield, we maintain our market-neutral Hold recommendation on HE common stock with a six-month target price of $25.25, or 16.4x and 14.9x our 2008 and 2009 EPS estimates, respectively. Price appreciation to our near-term valuation target, coupled with the $0.31 per share quarterly cash dividend which represents relatively high projected earnings payouts yet ought to be sustainable if the company is able to deliver modest earnings growth and given the company's historical maintenance of the current dividend rate represents annualized total return potential of 12.5%.
Read the full analyst report on HE.
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