Spark Infrastructure

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
29 August 2017, 9:06 AM
Sectors Covered:
Infrastructure, Utilities

1H17 result summary

The 1H17 result was a mixed bag, with +18% EBITDA growth from SAPN (ahead of expectations). The EBITDA decline from VPN (-13%) missed our forecast while the EBITDA decline from Transgrid (-15%) beat our forecast. Free cash flow across the assets declined, but to a lesser extent than we had expected given the outturn of capex.

Asset distributions to SKI were less than expected, mainly due to the materially reduced Transgrid distribution.

Key positives

Regulated revenue growth expectations for SAPN/VPN (3-5% pa CAGR for next three years) are relatively predictable under the revenue cap regulation. Solid unregulated earnings continue to be contributed by VPN and SAPN at low capital intensity. The unregulated connection base at Transgrid continues to be expanded, albeit at higher capital intensity (but more certainty) than VPN/SAPN's unregulated earnings. Each asset company is pursuing efficiency/cost-out programs. Effective interest rates on debt continue to track lower, as a result of attractive refinancings and locking in swaps at lower rates than previously. The gearing of SAPN/VPN is below target, providing capacity to fund capex and distributions.

Distribution guidance was reaffirmed at 15.25 cents per share for FY17 and 16.0 cents per share for FY18.

Key negatives

While lower than expected capex improves free cash flow and reduces debt, when it is (substantially) below the regulatory allowance (and our forecast) it results in a lower roll-forward of the Regulated Asset Base (RAB). This issue, which is accentuated by the current low CPI inflation, ultimately leads to lower regulated revenues during the next regulatory cycle (all else held constant) and lower long term value (teed off the RAB).

Large working capital movements and non-cash items seen in the results reduce the predictability of cashflows. Transgrid is having to fund relatively small amounts of unregulated growth capex with equity cashflow (resulting in less distribution to SKI), due to gearing constraints imposed by Moody's and the asset lease with the NSW Government. The 1H17 dividend per share (DPS) was not covered by operating cash flow, albeit guidance is for full coverage of the FY17 DPS.

Forecast and valuation update

We had been conservative on our SAPN interest cost and unregulated revenue assumptions, seeking proof of sustained performance. The 1H17 result has enticed us to improve our forecasts for these two items, which is the key contributor to the upgrade to our share price target. It also contributes a 6-8% increase in look-through asset cashflows. We leave our DPS forecast unchanged, aligning to guidance for 2017/18.

There is asset value on a standalone basis, with Merger & Acquisition upside risk. We retain our Add recommendation.

More information

Morgans clients can login to view our detailed report and upgraded share price target for Spark Infrastructure (SKI). Alternatively, please contact your nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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