Australia | Sep 04 2007
By Chris Shaw
Infrastructure assets can take many forms, from airports to toll roads to communication but as the Australian population continues to grow the demand for electricity makes an infrastructure company focussed on this sector an attractive alternative.
This is the view of Austock Securities with respect to Spark Infrastructure Group (SKI), the broker having initiated coverage on the stock with a Buy rating and a price target of $2.13 to reflect what it sees as an attractive valuation and a high yield.
The company holds a 49% stake in three electricity distribution businesses, Powercor and CitiPower in Victoria and ETSA in South Australia, the company itself being managed by a combination of Cheung Kong Infrastructure (CKI) and RREEF. CKI and Hong Kong Electric are the owners of the remaining 51% of the assets.
CitiPower has nearly 300,000 customers in and around the CBD and inner suburbs of Melbourne and generates about 17% of group revenues, Powercor has almost 700,000 customers in the western suburbs of Melbourne and regional Victoria and contributes 35% of revenues and ETSA operates in all the major population centres in South Australia and is the largest asset of the company in terms of revenues.
One reason for the broker’s positive view is the stock’s attractive relative valuation as it estimates the stock is currently on a regulated asset base multiple of 1.28x for FY08, a forecast yield of around 10% and an EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) multiple of 8.5x.
In contrast its peers offer yields of between 8.3%-10%, an average RAB multiple of 1.2-1.4x and an average EV/EBITDA multiple of 11.6x with a range of 9.5x-15x, so the company scores well on all three measures.
The broker also sees the stock as something of a safe haven given the current market volatility, as cash flows are defensive and stable and this suggests yields can be maintained. Supporting this view is the fact at the asset level 92% of debt is hedged through to 2010 while at the corporate level the company is 100% hedged.
Earnings growth appears more solid than outstanding, the broker forecasting earnings per share (EPS) will increase from the 0.5c achieved in FY06 to 2.5c in FY07, 3.1c in FY08 and 4.6c in FY09, while distributions are expected to grow from 14.1c in FY06 to 18.1c this year, 18.7c in FY08 and 19.3c in FY09.
Growth through acquisitions is expected but to date the focus has been on organic growth, which in the broker’s view shows the discipline of management in not overpaying for assets. It notes the company is currently considering opportunities in the mining regions of both South Australia and Western Australia.
The broker’s valuation on a DCF basis is $2.13, so it has set its price target at that level. This is in line with the view of the rest of the market as the FNArena database shows an average price target of $2.14, JP Morgan the top of the list at $2.30 and UBS lagging with a $2.00 target. Thomson One Analytics shows a median price target of $2.14.
The database shows the stock is rated as Buy five times and Hold twice, ABN Amro having downgrading its rating to Hold from Buy post the company’s recent earnings result.
Shares in Spark are unchanged in today’s trading and have a last sale of $1.87, while over the past 12 months the shares have ranged between $1.55-$2.11.