Spark Infrastructure (SKI) have announced that proportional EBITDA after fund costs increased 4%, or after net finance costs paid increased 12% (within 1% of forecast). Growth at SAPM (+23% growth year-on-year, 49% SKI) offset declines at VPN (-5% grwoth, 49% SKI); Transgrid was effectively flat (15.01% SKI).
At the fund level, solid growth in VPN inflows (+6.8%) was offset by a flagged decline in Transgrid receipts (-76%), such that Operating CF decreased 5% (excluding the DUET distribution) to 15.9 cps. This cashflow entirely covered the 15.25cps dividend per share. Fund level cash increased $16m or 1cps (no drawn debt). The aggregate Regulated and Contract Asset Base (RACB), which anchors long-term revenues and valuation, grew by 2.7%. SAPN/VPN's gearing (net debt: RAB) was effectively steady at 71.9%, compared to the FY20 target of 75%, while Transgrid's gearing improved 3.5% to 81.5% as cash was retained in the business (instead of distributed) to fund unregulated capex.
Digging a little deeper into the financials
While regulated revenues were relatively predictable (unregulated earnings less so), uncertainties regarding working capital (significant swings mainly due to revenue cap revenue accounting), operating cost (CFO highlighted the underling complexity), and tax (somewhat of a surprise that SKI now expects to become a tax payer in the short term) are evident.
Interest rate risk is mitigated through asset level hedging programs and the AER's 10-year trailing cost of debt approach, albeit Transgrid has a sizeable market exposure in FY18 as a result of interest rate swap expiries.
Other points of interest
While the unregulated opportunities available to Transgrid are exciting on a stand-alone basis, they are relatively insignificant to SKI investors given the size of both SKI's stake in Transgrid and the project investment involved. SAPN/VPM continue to be the main game. On this front, SAPN/VPM continue to exceed regulatory targets and deliver top of group operating performance.
Short term regulatory threats are being faced (AER's WACC review, ACCC's potential review of past asset values), albeit SKI seems comfortable on both.
DPS guidance for FY18 was reaffirmed at 18cps (+4.9% growth), SKI expects FY19-20 DPS growth of at least CPI, but notes low CPI hinders growth in CPI-X revenue allowances. Entering tax paying status in the short term is also a headwind. We suspect SAPN/VPN gearing capacity may be needed to support the SKI DPS in future years.
FY18 DPS guidance was re-affirmed at 16 cents per share, implying 6.6% income yield. SKI has the highest income yield in the sector. Our 12 month share price target has been reduced by 15cps, but we retain our Add recommendation.
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