Dalrymple Bay Infrastructure: Rock solid
About the author:
- Author name:
- By Nathan Lead
- Job title:
- Senior Analyst
- Date posted:
- 26 August 2021, 9:30 AM
- Sectors Covered:
- Infrastructure, Utilities
- 1H21 earnings were slightly up, highlighting defensive earnings in the context of 10% throughput decline.
- Cost savings on new interest rate swaps will contribute to earnings growth.
- ADD retained with (login to view) price target. Potential TSR of 20%, incl. 8% cash yield.
Dalrymple Bay Infrastructure (ASX:DBI) released its 1H21 result, with EBITDA +1% on pcp to $93.7m (ex IPO costs) and FFO +2% to $51m. This was marginally better than we expected.
We view this as a rock-solid result given terminal throughput was down 10% on pcp, showing the benefit of 100% take-or-pay contracts and regulatory protections.
The key earnings metric to focus on is funds from operations (FFO), which is EBITDA less net interest paid (tax is unlikely to be payable until “the medium term”). For the 12 months to 1H21, FFO was $99m.
DBI disclosed that it has reset its interest rate swap book for the next five years (executed $1.45bn at 0.857% pa fixed), on our estimates delivering a c.$20m/yr cost saving. That alone will increase FFO by 20%, before average credit margins rise over time as maturing debt is refinanced with a coal/ESG premium.
Following the expiry of the previous 5 year heavy-handed pricing cycle in June, DBI is now in direct light-handed negotiations with its customers, regarding terminal infrastructure pricing / revenues for the next 5 years.
While these negotiations may be drawn out (and could quite possibly require commercial arbitration by the QCA), the finalised pricing will ultimately back-date to July 2021. We think it could be materially higher than current levels. When combined with the net interest cost impact we can foresee a c.50% uplift in FFO by FY23F.
While we foresee a material uplift in FFO, DBI’s commitment is to 1-2% pa growth in DPS. We think the additional cashflow will be used to fund capex (which is rolled into the asset base and thus drives higher revenues) or debt repayment. Either of these should help support improvement in DBI’s key credit metrics, which in turn could help offset the ESG impact on refinanced debt margins.
It’s worth noting that DBI has entered into a MOU with the Qld Govt, Brookfield, and ITOCHU to undertake a feasibility study into a green hydrogen production, storage, and export facility to be sited at Hay Point (Mackay).
While early stages for the project, it offers the potential for DBI to: (1) diversify revenue sources or at the least offset coal declines over the long-term; (2) reduce the risk of significant rehabilitation spend being required at the end of DBI’s lease term; and (3) mitigate ESG / anti-coal sentiment against the stock.
Forecast and valuation update
EBITDA downgrades in the short-term as we recognise that DBI will continue to invoice at existing contracted rates until new pricing is finalised (albeit this should be NPV neutral).
We’ve also refreshed our interest/inflation rate assumptions down, and assumed the lower rates are reflected in negotiated revenues (assumes cost of service is more powerful in arbitration than value of service to customers). Interest rates are also updated for new interest rate hedges and refinancing.
DCF-based valuation declines 8 cps to (login to view), due to forecast changes.
ADD. DBI will appeal to income-oriented investors attracted to its cash yield which exceeds 8%. It may also appeal to growth-oriented investors, given the strong earnings growth we expect over coming years.
Positive news flow on terminal infrastructure charge negotiations with customers.
Regulatory, albeit noting the 2021-26 access undertaking has been finalised. Also, uncertain timing and outcome of direct revenue negotiations with customers.
ESG headwinds impacting cost of and access to capital and insurance.
Long-term outlook for metallurgical coal volumes processed through DBCT.
Timing and size of site rehabilitation requirements.
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