AusNet Services Limited

Company Overview: AusNet Services Limited (ASX: AST) is a diversified Australian energy infrastructure business that transports electricity through terminal stations and high-voltage transmission powerlines across Victoria. Through its network of underground gas pipelines, the company also supplies natural gas to residential and business customers in western Melbourne, central and western Victoria. The company’s sustainable growth strategy focuses on safe and reliable delivery of energy to customers and communities, whilst creating value for all its stakeholders. 

AST Details

Decent Growth Potential Backed by Diversified Business Model: AusNet Services Limited (ASX: AST) runs a diversified energy infrastructure business in Australia. As at 1 April 2021, the company’s market capitalisation stood at ~$6.97 billion. It has four operating segments that include Electricity Distribution, Gas Distribution, Electricity Transmission, and Growth & Future Networks business (including Mondo). The company sales have grown at CAGR of ~1.7% during FY17-20 on the back of its diversified business model. The company has enjoyed decent margins with EBITDA margins in the range of 57.4% to 62.1% and Net margins in the range of ~13.56% to 15.26% during FY17-FY20. Despite the challenging environment conditions caused by the COVID-19 pandemic, the company was able to report decent financial performance in H1FY21, owing to its continued focus on cost and financial management. During 1HFY21, revenue from Electricity Distribution stood at $502.0 million as compared to $483.2 million in 1HFY20, constituting ~48.1% of the total revenue. Electricity transmission business contributed ~28.9% to the total revenue at $301.6 million as compared to $305.8 million in the previous corresponding period.  

Looking ahead, the company is focused on reshaping its business by progressing an organisation-wide transformation program and it intends to maintain prudent financial settings to support asset base growth. AST plans to engage with key industry stakeholders to deliver an infrastructure led recovery and is on track to reach $1.5 billion of contracted energy infrastructure assets by FY2024. Considering the company’s diversified energy infrastructure business, continued focus on efficiency and cost management, and its organisation wide transformation program, AST seems well-placed to navigate through COVID-19 pandemic and play an important role in supporting the energy industry transition.

5-Year Financial Summary (Source:  Refinitiv, Thomson Reuters, Company Reports)

Decent Growth in H1FY21 NPAT: For the half-year ended 30 September 2020, the company reported total revenue of $1,039.4 million, up by 1.8% on the previous corresponding period (pcp). In response to the challenging operating environment, AST deferred various initiatives during H1FY21 and reprioritised its capital expenditure programs to minimise customer disruption caused by the lockdown. This helped the company in reducing the operating cost base. EBITDA for H1FY21 stood at $661.6 million, up by 5.7% on pcp. Due to the rise in EBITDA, reduction in net finance charges and higher lease interest income from the recently completed project, net profit after tax grew by 31.4% YoY to $225.7 million in H1FY21. As at 30 September 2020, the company had cash and cash equivalents of ~$28.3 million, and net debt of ~$8.2 billion.

H1FY21 Results (Source: Company Reports)

Decent Top & Bottom-Line Growth in FY20: During FY20, the company witnessed a 6.2% YoY growth in revenue to $1,977.6 million. Over the years, the company made various operational changes, which increased operating efficiency and delivered improved outcomes for its customers. Moreover, AST completed various growth initiatives during the year, including the construction of three connection projects for renewable generators, which have supported revenue growth. Cash flow from operations stood at $720.6 million in FY20, down by 11.4% on FY19, impacted by higher income tax paid due to higher immediately deductible capital expenditure in the previous period. Net profit after tax for FY20 stood at $290.7 million, up by 14.5% on FY19, driven by higher regulated revenues and customer contributions.

FY20 Results (Company Reports)

Key Metrics: For H1FY21, the company reported a gross margin of 64.2%, up from 60.1% in H2FY20. EBITDA margin for H1FY21 stood at 91.9%, up from 87.9% in H2FY20. ROE For H1FY21 stood at 7.4%, up from 3.95 in H2FY20. Current ratio for H1FY21 stood at 1.72x, up from 0.65x in H2FY20.

Profitability Metrics & Liquidity Profile, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 59.65% of the total shareholding, while the top four constitute the maximum holding. Temasek Holdings Pte. Ltd. and State Grid International Development Co., Ltd. are holding a maximum stake in the company at 31.47% and 19.12%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Track Record of Paying Decent Dividend: For FY20, AST paid a total dividend of 10.20 cents per share (50% franked), up 4.9% on FY19. From 2016 to 2020, the company’s dividend grew at a CAGR of 4.75%. For H1FY21, AST had paid an interim dividend of 4.75cps, which is at the upper end of the FY21 dividend guidance range 9.0 - 9.5cps, franked to 40%. At CMP of $1.850, the company annual dividend yield stood at 5.36%.

Dividend Trend (Source: Company Reports, Analysis by Kalkine Group)

EUR700M Subordinated Hybrid Issue: The company recently diversified its capital base and gained significant funding flexibility by pricing a EUR700 million, 60-year EUR hybrid security issue in the form of non-convertible subordinated notes. The proceeds from this will be used by the company for general corporate purposes, including redemption of certain other subordinated indebtedness. Further, it will also help in funding AST’s significant growth pipeline.

Key Risks: The company is exposed to the risks associated with the COVID-19 pandemic as it creates uncertainty in both the generation and use of energy. AST is also exposed to the risks related to industry developments as the energy industry continues to experience a period of significant change and uncertainty, with concerns around environmental issues, energy security, reliability and affordability. AST is also exposed to risks associated with the changes in technology, environmental and regulatory policies, customer expectations and cost.

Outlook: In order to deal with the challenging operating environment, AST is maintaining its focus on costs and financial management to support its significant growth pipeline and its credit profile in the near to medium term. Moreover, AST is committed to transforming its business to deliver strong outcomes for its shareholders and customers.  The company expects its regulated asset base to grow around 2.5% per annum to FY2024. Further, the company’s Mondo business is expected to reach $1.5 billion of contracted energy infrastructure assets by FY2024.

For FY21, the company expects its FY21 dividend to be in the range of 9 - 9.5 cents per share (40% franked).  AST’s growing regulated asset base and its contracted asset growth focus are expected to provide a solid foundation for future cash flow generation and shareholder returns. AST plans to release its FY21 full-year results on 12 May 2021.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock of AST has provided a return of 5.41% and is trading lower than the average 52-week price level band of $1.635 and $2.100, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$1.745 and a resistance of ~$1.96. We have valued the stock using a P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company might trade at a slight discount to its peers, considering the ongoing impact of COVID-19 pandemic, challenging working environment, and high net debt level. We have taken peers like Genesis Energy Ltd (ASX: GNE), APA Group (ASX: APA), and Spark Infrastructure Group (ASX: SKI). Considering the company’s decent performance in H1FY21, ongoing transformation, decent outlook, track record of paying decent dividend, current trading level, and valuation, we give a “Buy” recommendation to the stock at the current market price of $1.850, up by 0.817% as on 1 April 2021.

AST Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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