Hawaiian Electric Industries, Inc. (HE) reported $20.4 million, or $0.22 per diluted share ($0.23 basic), consolidated net income in the 1st quarter of 2009, compared to $34 million, or $0.41 per share (basic and diluted) in the year-ago quarter. Similarly, consolidated revenue of $543.8 million in the reported 1st quarter of 2009 was lower compared with revenue of $729.6 million in the 1st quarter of 2008.

Electric utility net income for the 1st quarter of 2009 was $14.1 million compared with $24.6 million in 2008. Lower net income was primarily due to lower electric sales and higher operations and maintenance expenses. Kilowatt-hour sales were down 7.4% in the reported compared with the year-ago quarter, impacting utility net income by an estimated $9 million. Sales were down mainly due to cooler, less humid weather and one less day of sales due to the leap year day in 2008.

O&M (Operations and Maintenance) expenses were up $9.4 million or 11.8% quarter-over-quarter. The increase in O&M expenses for the quarter was due primarily to $2.6 million higher maintenance expense, $2.5 million higher demand-side management costs, and $1.8 million higher planned production, transmission and distribution operations expenses and costs. Quarter-over-quarter depreciation expenses were higher by $1 million due to 2008 plant additions.

Bank net income was $10.9 million in the 1st quarter of 2009 compared to $14.6 million for the year-ago quarter. Net interest income in the 1st quarter of 2009 was $50.9 million, compared to $50.5 million in the 1st quarter of 2008. Lower interest expense, primarily due to lower borrowings and lower rates on deposits and borrowings, more than offset lower balances of mortgage-related securities and lower interest income on loans.

HE common stock trades at 12.1x and 8.1x, respectively, our 2009 and 2010 earnings per share estimates, or at a premium compared with its diversified energy utility industry peers. Meanwhile, the stock also trades at a discount on price-to-sales ratios, a slight discount to its peers relative to price-to-book value and price-to-sales multiples. Meanwhile, however, HE trades at the upper end of the range of relative cash flow multiples.

Although perfectly comparable public companies do not exist for HE, given the company’s electric business and unique banking operations, the case for a market-neutral rating is supported by a 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 8.0% dividend yield, although we also recognize the existing risks associated with the outcome of regulatory disputes and adverse movement of yield curve.

Going forward, the HE story looks promising, with stable earnings from regulated electric operations, new plant installations and improved banking operations, which witnessed higher net interest income and margin. However, a volatile interest rate environment, a weakening Hawaiian economy due to the global recession and volatile financial market, and uncertainties prevailing over the sustainable strength of the Japanese economy collectively continue to weigh on the stock’s valuation.

Therefore, with a mixed outlook and generally neutral valuation metrics, 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 $17.50, or 13.4x and 9.2x our 2009 and 2010 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 given the company’s historical maintenance of the current dividend rate (if the company is able to deliver modest earnings growth) — represents annualized total return potential of 35.8%.

Honolulu-based Hawaiian Electric Industries, Inc. is a holding company with subsidiaries engaged in electric utilities, banking, freight transportation, real estate development and other businesses, predominantly in Hawaii. The company also pursues the development of independent power projects in Asia and the Pacific.

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