We are maintaining our Neutral recommendation on
Hawaiian Electric Industries Inc.
). The company's third quarter performance surpassed the Zacks
Consensus Estimate but came in below the prior-year results.
Honolulu, Hawaii-based Hawaiian Electric Industries was founded
in 1891. The company along with its subsidiaries provides
electricity and banking services in Hawaii. The company mainly
utilizes renewable energy sources to produce electricity. The
company operates 57 branches and 119 automated teller machines.
With approximately 3,654 employees, the company's market
capitalization is $2.46 billion.
Hawaiian Electric is the largest provider of electricity in the
state of Hawaii, supplying more than 95% of the state's
population. In contrast to its utility-only peers, the company
also provides banking services to individual and commercial
customers. Its banking subsidiary is one of the largest banks in
Hawaii. Going forward, the major growth drivers of electricity
consumption are tourism and construction, the two leading
industries in Hawaii.
The tourism industry is recovering on the back of an economic
recovery in the U.S. and Japan. These two countries generate the
largest number of tourists to Hawaii. This is also reflected in
Hawaii's state visitor arrival, which grew by 3.8% in 2011 over
2010. State visitor expenditures also continued to grow,
increasing by 15.6% in 2011 over 2010. Hotel occupancies and room
rates remain higher year over year. Finally, Hawaii's
construction industry is also showing signs of recovery with a
rising trend of public contracts for new commercial and
industrial building permits. Hawaii's low unemployment rate of
5.3% in November 2012, well below the national unemployment rate
of 7.7%, is indicative of its economic health.
Hawaiian Electric is progressing smoothly to comply with the
Hawaii Clean Energy Initiative (HCEI), which calls for generating
70% of its energy needs from renewable sources by 2030. The
Hawaii Public Utilities Commission (PUC) is also supportive of
the company's focus to reduce its dependence on imported fossil
fuels by substantially increasing the use of renewable energy.
The company plans to spend approximately $3 billion over the
five-year period 2012 through 2016 for capital expansion programs
with a distinct focus on renewable energy projects. Of the
projected $3 billion of capital expenditures, approximately 39%
are targeted for environmental compliance, infrastructure
investments for fuel and to integrate renewable sources into the
system; 38% are earmarked for transmission and distribution
projects; 13% for generation projects; and 10% for maintenance.
Along with long-term expected earnings growth of 6.4%, this Zacks
Rank #2 (Buy) stock also offers a solid dividend yield of 4.9%
(Zacks Industry Average 3.5%). The company has been paying stable
and consistent dividends since 1901, which adds to the
attractiveness of its shares. Going forward, we believe the
company is well positioned to continue to deliver attractive
earnings growth with reduced risk and volatility cumulating in an
above-average dividend yield.
On the other hand, Hawaiian Electric generates a major portion of
its consolidated revenue by supplying electricity in Hawaii.
Accordingly, the company's earnings prospects are highly
correlated with the strength of the underlying Hawaiian economy,
which in turn depends primarily on Japanese tourism.
Hawaiian Electric's performance will be affected if there is any
adverse regulatory decision. It would be difficult for the
company to sustain its profitability, resulting in capital
expenditure reductions. Also the company's position as a
bond-proxy makes it vulnerable to swings in market interest
rates. All these may hamper Hawaiian Electric's borrowing cost
from the market, which in turn would constrain future rate base
growth of the utility.
Finally, the actual return on equity (ROE) of the company's
electric utilities remains a tad below the approved rate of
return. The company is gradually narrowing the gap between its
actual and allowed ROEs by implementing sales decoupling, revenue
adjustment mechanisms and general rate increases. However the
company still has to go a considerable way before it can match
the approved rate. Also, Hawaiian Electric's focus on adding new
assets has resulted in rising operations and maintenance
overhead. The company anticipates operations and maintenance
overhead to increase by 6% in fiscal 2012.
Hence, we see the stock as having limited upside potential. We
maintain our Neutral rating on the stock and expect it to perform
in line with the broader market. This is in line with its peers
CMS Energy Corporation
OGE Energy Corporation
CMS ENERGY (CMS): Free Stock Analysis Report
HAWAIIAN ELEC (HE): Free Stock Analysis
OGE ENERGY CORP (OGE): Free Stock Analysis
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