AusNet Services: Closing time

About the author:

Author name:

By Nathan Lead

Job title:

Senior Analyst

Date posted:

12 November 2021, 9:30 AM

Sectors Covered:

Infrastructure, Utilities, Banks

• AST released its 1H22 result, albeit it was a non-event given the agreed takeover by Brookfield.
• The takeover is expected to be implemented in February/March 2022.
• AST announced a 1H22 dividend of 4.75cps (unfranked and trades ex on 16 November), which will be deducted from the all-cash takeover price of $2.65/sh. Hence, we set our target price at (login to view). AST does not intend paying a special dividend before the takeover is closed.

Analysis

Management discussed the size and scale of the multi-year energy transition underway within the NEM and the electricity network investment opportunities arising from it. Unfortunately, with the takeovers of AST and SKI investors have no listed exposure to this structural growth. 

1H22 EBITDA declined -4% on pcp to $634m (or $654m with lease income). However, we deduct customer contributions which we view as a direct one-off contribution to capex.

On this basis, EBITDA declined -5% to $596m and narrowly missed our forecast of $606m. Earnings were impacted by declining regulated revenues and weather events. 

1H22 cash from operations declined -6% on pcp to $403m, beating our forecast $373m. The decline was mainly driven by lower cash EBITDA.

Capex lifted +4% on pcp to $393m, above our forecast $359m (capex is good in the world of regulated assets as it is included in the asset base for future return on and return of capital revenues).

Note though that $46m of this capex related to customer contributions. Also note the $59m of spend on Development & Future Networks including Western Victorian transmission and Moorabool battery.

As well as the low-return/low-risk earnings of AST’s core regulated networks business, we think AST’s takeover premium reflects the growth coming from contracted earnings related to this segment of AST.

The Regulated and Contracted Asset Base increased +4.6% on pcp to $11.3bn. Hence, the implied takeover multiple paid by Brookfield is 1.54x (vs 1.46x for Spark Infrastructure’s takeover).

Forecast and valuation update

Forecast changes are irrelevant given the agree takeover proposal.

Target price is lifted to (login to view) to align with the takeover consideration less the 1H22 DPS.

Price catalysts

Upside is now capped given the fixed takeover consideration.

Risks

The bid not proceeding. FIRB sign-off is the key government approval required, but given Brookfield’s consortium is Canadian and Australian funds we think it highly likely this approval will be received.

Shareholder approval is also required – 32.7% shareholder Singapore Power supports the takeover but uncertainty surrounds the intentions of 19.9% shareholder State Grid Corporation of China.

Extended delays in the deal’s completion. However, if the scheme is implemented after March 2022, AST shareholders will be entitled to additional consideration from Brookfield of $0.000260274 per share for each day after 31 March 2022 that has elapsed by the implementation date.

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