Solid DUET Result Feeds Brokers Optimism

Array
(
    [0] => Array
        (
            [0] => ((DUE))
            [1] => ((SKI))
            [2] => ((SPN))
        )

    [1] => Array
        (
            [0] => DUE
            [1] => SKI
            [2] => SPN
        )

)

This story features SPARC TECHNOLOGIES LIMITED.
For more info SHARE ANALYSIS: SPN

By Chris Shaw

Companies with high debt levels and those involved in financial engineering have been among the most sold off in the current market environment but following a solid profit result brokers don’ t include Duet Group ((DUE)) among that list, most continuing to rate the stock as a Buy post its earnings report.

Credit Suisse upgraded to Outperform from Underperform (two steps up) on the back of the result, the broker now seeing the company as its preferred exposure in the listed infrastructure sector. The highlight of the result in the broker’s view was the strong performance of the Duquesne Light assets, while the Dampier-to-Bunbury pipeline asset also delivered strong operational numbers.

Taking a broad view the broker suggests the major point of differentiation between the stock and others in the sector is the discipline management has shown in selectively adding assets to the portfolio rather than being more aggressive in chasing expansion opportunities and so paying away some value.

Even following this more considered approach the company is expected to deliver solid earnings growth and the broker has lifted its forecasts by around 6% this year to reflect this. For Merrill Lynch a major attraction is the security of group cash flows, as prices are locked in through to 2010 and costs are largely contracted.

While acknowledging there may have been some disappointment in the market from the lack of any increase in distribution guidance the broker regards the move as conservative given $550 million in POWERS notes are due for conversion later this year and the company has more flexibility with respect to its options by retaining existing distribution guidance.

Supporting the broker’s Buy rating is the upside it sees in the group’s development pipeline, which it estimates could be worth as much as an additional $1 per share going forward. As well it expects distributions to increase in FY09 to bring the yield to 9.5% compared with 9% currently, which together with the solid cash flows on offer leads the broker to suggest the stock deserves a premium relative to peers such as Spike Infrastructure ((SKI)) and SP Ausnet ((SPN)).

Given the result marginally exceeded its forecasts UBS has lifted its estimates slightly going forward, its new numbers implying distribution growth of 4.5% annually in coming years. JP Morgan also retained its Outperform rating post the result, noting gearing at 60% is comfortable compared to others in the sector, especially as no refinancings are due until 2010.

ABN Amro is the only one of the six brokers in the FNArena database covering the stock not to rate it as a Buy, the broker taking the view the lack of an upgrade in distribution guidance may be seen as disappointing, while recent share price gains mean value is no longer as compelling.

As a result it has downgraded its rating to Hold given the stock now yields only around 9% compared to its peer average of closer to 11%, though given the solid profit result and good cash flows the group is generating the broker expects the share price will continue to gain support.

Following the earnings result the FNArena database shows an average price target on the stock of $3.59, compared to $3.63 pre the result. ABN Amro is the least aggressive with a target of $3.15, while UBS is the most aggressive with its $3.90 target.

Shares in Duet today are weaker in line with the broader market and as at 11.50am were 5c lower at $3.04, which compares to a range for the past 12 months of $2.38 to $4.19.

Click to view our Glossary of Financial Terms