Dalrymple Bay’s Strong Yield Growth Outlook

Small Caps | 10:05 AM

Dalrymple Bay Infrastructure has appeal to investors seeking dependable and growing yield and defensive elements for their portfolio.

• Dalrymple Bay Infrastructure’s first half result in line with consensus
• Full year dividend guidance suggests 8% growth
• Approximately $371m of NECAP projects underway
• The company benefits from attractive risk mitigants

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 Dalrymple investment thesis.

It is why the shares trade more like a bond-proxy infrastructure asset than a commodity-exposed operator.

First Half Result

Dalrymple Bay’s first half 2026 TIC revenue rose 4% year on year to $157m, in line with consensus. Funds from operations (FFO) of $93m were 10% higher and -2% below consensus on higher tax expense.

The board declared an unfranked interim distribution of 6.75cps, taking total first half distributions to 13.5cps, 17% higher year on year, reflecting 72% of FFO, within the 60%-80% target range.

Distributions on a TIC year 2025/26 basis (TIC years begin on July 1) totalled 26.4cps, and Dalrymple Bay has reaffirmed guidance for distributions of 28.6 cps for TY–2026/27, representing 8% growth, above the top end of longer-term guidance of 3%-7%.

The company expects to return to partly franking the distribution from the first half 2027.

Operating cashflow was stronger than expected (31%) but was mostly due to excess pass-through revenues that will be returned to customers (partly offset by a tax receivable being pushed into later periods).

Feedback from the conference call is that the demand queue at the Dalrymple Bay Terminal has risen to 33Mtpa, from 29Mtpa in FY25, mainly on customers seeking new capacity following recent corporate activity in the sector.

Ord Minnett notes this doesn’t impact on earnings, given Dalrymple Bay’s 84.2Mtpa capacity is fully contracted until June 2028, but it favours the company when it comes to access undertaking renewal negotiations in 2031 and could support future projects.

NECAP

Dalrymple Bay’s priorities for 2026 include the completion of Shiploader 1A (SL1A) to replace Shiploader 1 (SL1) and Reclaimer 4 (RL4) to replace Stacker Reclaimer (SR2).

Including these, the company has approximately $371m of NECAP projects underway that are yet to be added to the NECAP asset base. Around $300m will be added to the NECAP asset base on 1 July 2027, which will result in a $0.53/tonne uplift in the NECAP charge component of the TIC.

Every $0.10/tonne increase in the TIC delivers approximately $8.5 million of incremental revenue per annum, Ord Minnett notes.

The 53c/t uplift in the NECAP charge component is -5c/t below Morgans’ previous forecast, due to the timing of NECAP commissioning.

Morgans expects the TIC shortfall will be caught up in the annual TIC adjustment in TY-2028/29 and forecasts the NECAP element of the TIC to increase by 70c/t across TY-2028/33 as a further circa $500m of NECAP (including capitalised weighted average cost of capital) is added to the asset base.

Future NECAP will likely comprise business-as-usual cost of $30m-$50m/year, potentially $100m/five years on gallery wrapping, as well as major projects Shiploader 2 replacement/refurbishment and a decision on Shiploader 3 (younger than Shiploader 2 but has serviced the same volume).

Dalrymple Bay reiterated the expectation that there would be some $400m of further NECAP projects in the 2020s that are yet to be committed, including the Shiploader 2 replacement/refurbishment.

On the downside, UBS interprets management's commentary to suggest the next major works to be approved may be later than previously expected, and as such UBS has pushed its SL2 assumption TY-2030/31 and SL3 to join beyond the current access regime.

Accordingly, UBS has slowed the pace of its payout ratio increases until after the bulk of the capex has been spent and the new assets contribute to revenue.

By contrast, with interest costs now effectively fixed, Citi expects Dalrymple Bay will continue to be able to lift its dividend at the high end past the 3%-7% growth target range for the foreseeable future.

Looking Ahead

Dalrymple Bay’s first half average debt cost was 4.7%pa, but it exited the half at 7.0% pa. Guidance suggests it will remain at this level for the next 24 months.

This is in line with Morgans’ forecast and is largely due to expiry of ultra-cheap interest rate swaps in the first half which were replaced at much higher rates applying from the second half.

Higher interest costs create a headwind to FFO growth, Morgans notes.

The company has 100% take-or-pay contracts through to June 2028, with five-year “evergreen” renewal options available to its customers. Customers are required to make a renewal decision by June 2027.

Dalrymple Bay expects existing mines to renew and that 100% take-or-pay will continue. If existing customers choose to reduce contracted capacity, the company can offer this capacity to its 33Mtpa capacity queue, Morgans notes, then “socialise” any remainder (hence customers pay the revenue shortfall).

Management acknowledged reports that Macquarie Asset Management was considering the sale of its 50% stake in Port of Newcastle (the other 50% is owned by China Merchant Holdings) and said it would consider its options when it comes to market.

Acquisition growth options remain, Macquarie (the broker) notes, albeit Hay Point is unlikely. Port of Newcastle is possibly interesting, Macquarie suggests, albeit it is broader than coal and possibly peak coal volumes will have occurred in FY30 (Australian Rail Track Corporation forecast).

Morgans’ warns management’s acknowledgement of its interest in the Port of Newcastle sale unsettles the thus-far dormant risk of M&A value destruction.