Australia | May 14 2009
By Andrew Nelson
The FY09 results were solid, coming in a little above Austock’s expectations. And so they should given the broker’s view that the defensive characteristics of SPN in specific, and the regulated utilities space in general, offer some very attractive characteristic in this troubled market.
But the problem the broker has is: no matter how defensive and attractive the stock is, the company really needs to be offering a better yield, which they’ve cut to fund capex.
All up, distributions were reduced by 33% with the intent of strengthening the balance sheet and to allow the company to hold on to more internally generated cash. In FY09, the company will pay out distributions of about 11.9cps, which in-line with expectations, but from FY10 this will drop to 8cps on the company’s numbers. In and of itself, the broker thinks this looks like a reasonable move given the current market environment.
However, at the same time the company also announced it would be raising $330m to $415m in new equity via a 1 for 4 rights issue at 78cps to help fund around $2.7bn in capex over the next five years. The broker thinks strengthening the balance sheet, especially given the current market makes sense, but adding in an equity raising to fund growth capex will end up being value dilutive over the short to medium term.
On the broker’s numbers, the marginal cost of equity at the 78cps raising price is around 15% and Austock can see little use in raising equity that costs 15% to increase growth outside of mandatory capex requirements that will provide an equity return of somewhere between 10% and 12%. Management claims that some of these capex programs could help generate higher than standard regulated returns, but the broker is sceptical, believing only a cheap M&A acquisition could deliver a truly value accretive outcome.
Austock is of the view that SPN would have been better off had management actually cut back discretionary capex in order to increase free cashflows to supplement a stronger yield. If there truly are some value accretive options for using the cash raised, then the broker thinks that raising equity via underwriting distributions for the next 18 months would have been a better way to go.
Even at pre-capital raising prices, the broker saw the stock as having some absolute value, even if it did look a bit expensive versus its peers. But now, the stock seems fully priced on an absolute basis and outright expensive versus its peer group. Sure, admits Austock, SP Ausnet will have one of the best looking balance sheets around, but this balance sheet strength will be whittled away by the capex program.
With this in mind and coupled with a much lower yield and higher multiples going forward, the broker has downgraded its recommendation from Hold to Sell and cut its price target to 95c (from $1.10). This is a pretty pessimistic view when compared to the 6 Buys and 1 Hold and the $1.21 average price target listed on the FNArena database.
In short, the broker is concerned that 51% SPN owner Singapore Power is simply too focused on growth and seems to be utterly ignoring value. This belief, says Austock, is also borne out by the fact that when Singapore Power acquired part of Alinta, it nearly put all of the expensive bits into SPN. The broker prefers Spark Infrastructure ((SKI)) in the regulated utility space, as it not only offers better value and a better yield, but it also looks to be a little more disciplined when it comes to capex and expansion.
Yesterday, shares in SP Ausnet finished 1.5c higher at 89c and over the last 12 months the securities have traded between 87.5c and $1.275.
