Dalrymple Bay Infrastructure: Attractive yield with upside potential

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
05 January 2021, 8:00 AM
Sectors Covered:
Infrastructure, Utilities

  • On the basis that DBCT transitions to light-handed regulation, we initiate coverage with an ADD rating (login to view target price). Potential 12-month TSR at current prices is c.30%. 
  • In the current low interest rate environment, income-oriented investors will be attracted to Dalrymple Bay Infrastructure's (ASX:DBI)
    high cash yield (8.7%) and commitment to 1-2% pa DPS growth. 
  • Next key events are DBI's FY20 result and the QCA's Final Decision on light-handed regulation (both due Feb-21), the judicial review of regulatory coverage revocation (maybe 1H21), and the start of the next regulatory cycle (July-21).

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Company overview 

Dalrymple Bay Infrastructure holds the 99 year lease to the 85 Mtpa Dalrymple Bay Coal Terminal (DBCT), of which c.80% of throughput is metallurgical coal (used in steel-making). DBCT offers the cheapest export route-to-market for users within its Bowen Basin (Qld) catchment region. DBCT is fully contracted from 2023 to 2028.

How does DBI make money? 

DBCT charges users for access to its export capacity on a take-or-pay per contracted tonne basis; these charges are currently subject to QCA regulation. Once the revenue allowance for a five year regulatory cycle has been finalised, cashflows are typically very stable.This is due to the significant risk mitigants within DBI's operating structure, revenue contracts, and regulatory regime.

This stability has historically allowed DBI to support high debt levels. However, we would have stronger conviction in our investment view if DBI had less debt, given it is facing headwinds on access to and pricing of insurance and debt, as well as uncertain timing and cost of site rehabilitation. 

What is the outlook for distributions? 

DBI has committed to a distribution yield of 7% on its IPO price (implies 8.7% at current prices), and to growing its DPS at 1-2% pa. The distribution is unlikely to be franked for a number of years, given DBI is not expected to be in a tax-paying position

DBI distributes a higher proportion of its EBITDA to investors than its peers on the ASX, due to higher debt levels and tax status. 

Could earnings change meaningfully? 

DBI's current 5-year regulatory cycle is due to expire in mid-2021. We think it looks likely that regulation will transition from heavy-handed to light-handed regulation (at the extreme regulatory coverage could be revoked). If so, annual EBITDA could increase by c.$25-45m (albeit arbitration with uncertain timing may be required).

In addition, we expect debt service to reduce by c.$20-30m as existing interest rate swaps expire. Hence, potential for a c.50% increase in Funds from Operations. If heavy-handed regulation remains, EBITDA could decline by up to c.$30m, mostly offset by the lower debt service. 

What is the stock worth? 

The key value drivers are the asset base, asset life (and thus the related timing and size of remediation spend), revenue outcomes (light-handed vs heavy-handed), and cost of capital.

Our 12-month target price (login to view target price) assumes light-handed regulation is approved. If status quo regulation remains, then a harsh downside valuation is $1.52. We have not factored in site rehabilitation costs given uncertainty on requirement, timing and size, but note there is a large range to the potential valuation impact.

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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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