Australia | Aug 25 2009
By Chris Shaw
Spark Infrastructure ((SKI)) delivered what Bank of America Merrill Lynch regarded as a strong interim profit result with proportional asset earnings before interest, tax, depreciation and amortisation (EBITDA) increasing 16.7% to $308 million in the period, well above the broker’s $274 million forecast.
In BA-ML’s view, all the group’s segments contributed to the result as regulated revenues rose 8% and unregulated revenues fell just 9.3% despite the economic slowdown. As well, capital management was in evidence as the company refinanced $175 million of debt related to CitiPower during the period.
The result was also better than other estimates in the market as JP Morgan had been expecting EBITDA of closer to $268 million, though the broker notes the difference can largely be attributed to higher customer contributions but as it points out these don’t support cash flow generation for the company.
Post the better than expected result, RBS Australia has lifted its forecasts for coming years but the broker continues to point out what others to cover the stock also see as an issue going forward – the need for additional equity to be raised to meet surging capital expenditure requirements for its assets.
On the broker’s numbers, as much as $250 million in fresh equity will be necessary between FY11 and FY15. RBS sees the money being acquired over the group’s reset periods rather than via a single upfront capital raising that would be more dilutive.
Regardless, the fact capital will need to be raised is reason for caution according to JP Morgan, while the broker is also taking such an approach given the company still has a number of regulatory hurdles to face as there are final determinations to be made for all the group’s assets in 2010.
These decisions will impact on the company’s capital management plans and so the uncertainty over final decisions leads the broker to suggest the stock is likely to range trade until the regulatory and capex decisions are actually announced.
To reflect this, the broker has retained its Neutral rating on the stock post the interim result, a rating matched by Credit Suisse given it shares the same concerns as does JP Morgan with respect to regulatory and capex outcomes.
But the stock is a Buy according to Bank of America Merrill Lynch as it offers a dividend yield of around 12.2% at present while it is trading on an attractive and below peers EV/EBITDA (enterprise value to EBITDA) multiple of just 6.8x, this for a company with underlying assets all rated as A-.
Supporting the broker’s rating is its view the upcoming resets are largely de-risked and while it accepts equity will be required in coming years, BA-ML agrees with RBS the capex required can be spread over time, meaning the market is somewhat overplaying concerns of a pending equity raising. Given its similar view, RBS Australia also retains its Buy rating post the earnings announcement.
In the wake of Spark’s interim result there have been no changes to broker ratings, the FNArena database showing the stock scoring five Buys and five Holds with an average price target of $1.42, essentially unchanged from prior to the profit announcement.
Shares in Spark today are slightly higher and as at 11.50am the stock was up 0.5c at $1.115. Over the past year it has traded in a range of $0.83 to $1.665.
