AusNet Services (AST) is offering a cash yield of 6.1%, or 7.2% on a grossed-up basis (assuming 40% franking). Whilst this sounds great, there are a few things you need to know about the company and how it is trading. We recently reviewed AST following the recent release of results for the six months to 30 September 2018 (1H19).
About AusNet Services
The Company owns and operates three regulated energy network businesses. These include Victoria’s high voltage electricity transmission network, an electricity distribution network in eastern Victoria and a gas distribution network in western Victoria. Regulated revenues account for about 85% of group revenue. The Company also owns an unregulated business, Commercial Energy Services (CES). This provides contracted infrastructure asset services and technology solutions to 3rd parties. AST has a total asset base of $12.4b, of which $9.4b is regulated and $637m is contracted.
Asset Base Growth Expected To Accelerate
The Regulated Asset Base (RAB) grew ~5% in 1H19, while the Contracted Asset Base (CAB) lifted 18% to $637m. Connections activity related to renewables generation and batteries accelerated (and AST sees no signs of this abating). The outlook is for continued growth in regulated asset base of around 3.5% per annum to FY21 and its unregulated infrastructure assets (i.e. CAB) to grow by ~20% per year. The Company noting increases in connection enquiries from renewable generation developers and favourable market conditions.
AST is also on track to achieve $1b of contracted energy infrastructure assets by FY21. Government policy towards renewables is also growing the CES business. It has $937m of committed infrastructure that is either completed or under construction. The opportunity here lies in building and owning unregulated transmission lines, typically connecting new wind farms to AST’s regulated transmission network.
Accordingly, with this additional amount, AST could reach its FY21 target for $1b in contracted energy assets ahead of plan. The Company also indicated that although there was sustained growth in investment opportunities, it would remain financially disciplined and focused on seeking out long-term project partners.
Declining Dividend Profile
Modest tariff increases and cost savings out to FY21 (the majority of which is expected to come from Electricity Distribution operations) are expected to support low- to mid-single digit growth in distributions at least until the next regulatory reset in January 2021. AST has 85% of regulated revenue locked in until the next regulatory reset on 1 January 2021.
However, uncertainty with respect to energy policy (in light of the Federal Government’s efforts to lower utility bills) poses a downside risk to future growth in earnings and distributions thereafter. With price resets in FY22, distribution growth is likely to be moderate. In particular, DPS growth across FY20-22 is expected to be ~2% per annum, which is less than the annual DPS growth over the period FY16 to FY19.
Fundamental View
At current levels, AusNet is offering a cash yield of 6.1%, or 7.2% on a grossed-up basis (assuming 40% franking). Notwithstanding the attractive yield on offer, we take a cautious view on AST in light of:
i. The risk to future growth in earnings and distributions from uncertain energy policy. The Federal Government remains committed to lowering retail utility prices, and so pressure will remain on distribution network service providers to reduce network charges despite potential increases to CAPEX. In terms of the revenue growth outlook, the Company indicated that regulated revenues were expected to continue declining in 2H19. However, at a somewhat moderated pace.
ii. There are also potential for delays and cost overruns with the Rapid Earth Fault Current Limiter (REFLC) program. AST is installing REFCL devices at 22 zone substations by 1 May 2023. Recent Company commentary and disclosures indicates that the project is providing technical challenges.
Charting View of AST
AST is in no-man’s land at the moment. It broke under an obvious support line several weeks ago and is therefore at risk of falling further in the short term. The next support level is down near $1.50. If that can’t hold, then we are looking at levels closer to $1.40. Otherwise if AusNet can push beyond $1.65, then it should be on its way towards the $1.80 level.
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Michael Gable is managing director of Fairmont Equities.
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