Small Caps | 10:30 AM
Dalrymple Bay Infrastructure is not a coal company, equating more to a utility, making it attractive in the current environment.
- Dalrymple Bay Infrastructure generates revenue irrespective of coal volumes
- Inflation-linked earnings and take-or-pay contracts underpin value
- NECAP provides an attractive return
- Earnings and dividend grow over time
By Greg Peel
Dalrymple Bay Infrastructure’s ((DBI)) sole asset is the long-term lease and operating rights to the Dalrymple Bay Terminal, the world’s largest metallurgical coal export terminal by capacity, located at Hay Point near Mackay in Queensland.
The terminal serves the Bowen Basin, one of the most important coking coal regions globally.
The company’s operating model sees producers contracting throughput capacity on long-duration, take-or-pay agreements (a contractual clause requiring the buyer to either take delivery of a minimum quantity of goods or pay a specified amount even if they do not take delivery).
The company earns a Terminal Infrastructure Charge (TIC) regardless of whether the contracted tonnes are shipped.
The TIC is regulated by the Queensland Competition Authority and is principally CPI-linked, and where it is not, it is linked to the Australian ten-year bond rate, which is tracking higher, which embeds inflation protection directly into revenue.
Earnings growth is driven by inflation-linked base charges and incremental earnings on commissioned non-expansion capital expenditure (NECAP) projects.
This combination of regulated pricing, inflation linkage and take-or-pay structure is the core of the stock’s investment thesis.
It is why Dalrymple Bay trades more like a bond-proxy infrastructure asset than a commodity-exposed operator.
Risks and Risk Mitigants
Dalrymple Bay Infrastructure listed in 2020 and has risen 130% in the interim.
Following the company’s FY25 result release in late February, the stock fell -14% from its high to mid-March. At the time, Morgans saw no factor causing a material change to the fundamental value of the business.
It was nonetheless a volatile time in the market generally, following Trump’s war and an RBA rate increase in February, followed by another in March.
Morgans’ forecasts and valuation for the stock included the higher interest rate environment and elevated short-term inflation.
Morgans upgraded Dalrymple Bay to Buy from Hold. This was either a prescient call or the reason why the stock immediately rallied most of the way back.
The company benefits from attractive risk mitigants, Morgans noted, including 100% take-or-pay, revenue socialisation, force majeure protection, and direct opex pass through.
Morgans suggested the stock may appeal to investors seeking dependable and growing yield and defensive elements for their portfolio.
The stock is not without its risks, the broker acknowledged, including the negotiated TIC price applicable when the current customer agreement expires in 2031, the long-term outlook for metallurgical coal volumes processed through the terminal, regulatory risks given QCA oversight, higher interest costs, lower inflation rates, and ESG impacting cost of and access to capital and insurance.
The key risk, Morgans suggested, is capital management, including risk of value destructive M&A.
Risks notwithstanding, Morgans retains a Buy rating and $5.35 price target.
Last week Citi agreed that, in general, Dalrymple Bay is a defensive stock with uncorrelated returns. However, looking forward Citi believes there are additional reasons to own the stock.
With upward pressure on CPI, the TIC base component is likely to positively surprise, while the NECAP charge has leverage to the increasing yields, at a time when the base is increasing materially.
Offsetting this will be higher interest costs, however Citi notes some 85% of the debt is hedged.
As a result, the broker thinks the stock is a strong candidate for most portfolios in the current environment, and foresees near term upgrades and certainty to earnings.
Citi has a Buy rating and $5.75 target.
The War
Iran’s blockade of the Strait of Hormuz, and Trump’s blockade of Iran’s blockade, have impacted the prices of many commodities, most notably oil and gas.
Thermal coal prices are also elevated on expectation of gas-fired to coal-fired electricity generation switching.
Metallurgical coal, used in steel making, is less impacted and more beholden to Chinese steel demand. However, the locomotives that haul the coal trains from the Bowen Basin are diesel-powered.
Macquarie noted last month in case there is no diesel, the contracts with miners are take or pay on contracted volume. This diesel shortage does not therefore impact Dalrymple Bay, so revenue (TIC) is stable.
The inflationary impact of the higher oil price is a minor positive to the TIC income, Macquarie notes, with this mainly coming through 2027. As debt associated with the base TIC is hedged, there is a positive cash flow impact.
NECAP-based TIC floats on annual ten-year bond reset (April-May), yet debt associated with this spend is floating on the 90-day bank bill.
Ten-year bonds have increased some 70bps since last year which re-opens the spread on 90-day bank bills.
Macquarie points out this is favourable to 2026 and 2027 earnings.
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