Company Overview: AusNet Services Limited (ASX: AST) runs a diversified energy infrastructure business in Australia. AST is mainly involved in transporting electricity and distributing natural gas to residential and business customers. The company owns and operates the Victorian electricity transmission network, which is one of five electricity distribution networks in Australia. The company’s sustainable growth strategy focuses on safe and reliable delivery of energy to customers and communities, while creating value for all its stakeholders.
AST Details
Long-term Fundamentals Intact Backed by Growing Asset Base: 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. As at 27 April 2021, the company’s market capitalisation stood at ~$6.65 billion. During FY21 (year ended 31 March 2021), the company responded to COVID-19 pandemic by reprioritizing its work, which allowed it to manage its costs while maintaining its networks. Despite the challenges created by the COVID-19 pandemic, the company has continued to manage its dividend settings in accordance with its core principle of providing long-term, sustainable returns to its shareholders. For the full-year FY21, AST delivered a dividend outcome at the top end of its guidance at 9.5 cents per share. During FY21, the company also grew its regulated & contracted asset base to $11.16 billion, up from $10.857 billion in FY20.
Looking ahead, the company is focused on maintaining strong capital management settings to successfully manage risks while taking advantage of future opportunities to deliver long-term shareholder value. Further, the company is also focused on driving improvement across its key strategic priorities. In its electricity transmission network, AST currently has around 8,000 MW of additional connection project opportunities. Considering the company’s diversified energy infrastructure business, continued focus on efficiency and cost management, and growing asset base, AST seems well-placed to navigate through COVID-19 pandemic and play an important role in supporting the energy industry transition ahead.
5-Year Financial Summary (Source: Analysis by Kalkine Group)
Decent FY21 Results Despite COVID-19 Led Uncertainties: For the year ended 31 March 2021, the company reported revenue of $1,924.5 million, down by 2.7% on the previous year. Further, the company reported EBITDA of $1,154.6 million, down by 3.5% on FY20. Both revenue and EBITDA were impacted by several material items including $30.7 million impairment charge against the goodwill and certain software assets of AST’s Geospatial business and $14.7 million of bushfire remediation costs. Notably, the company’s revenues were positively impacted by volume outperformance in electricity distribution. Cash flows from operations grew by 17.2% YoY to $844.5 million in FY21. During the year, AST strengthened its balance sheet in order to take advantage of future growth opportunities. Net profit after tax stood at $302.1 million in FY21, up by ~3.9% on FY20. From FY17 to FY21, the company’s NPAT grew at a CAGR of 4.32%. As at 31 March 2021, the company had cash and cash equivalent of $827.9 million and borrowing (current & non-current) of $9,187.2 million.
5-Year NPAT Trend (Source: Analysis By Kalkine Group)
Key Metrics: In FY21, the company reported a gross margin of 91%, up from 88.7% in FY20. EBITDA margin for FY21 stood at 62.3%, up from 61.3% in FY20. ROE for H1FY21 stood at 9.4%, up from 9.2% in FY20. Current ratio for FY21 stood at 2.41x, up from 0.65x in FY20.
Profitability Metrics & Liquidity Profile (Data Source: Analysis by Kalkine Group)
Top 10 Shareholders: The top 10 shareholders together form around 60.25% 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 19.9%, respectively, as also highlighted in the chart below:
(Source: Analysis by Kalkine Group)
Track Record of Paying Decent Dividends: AST has a track record of paying decent dividends to its shareholders. From FY16 to FY21, the company’s dividend grew at a CAGR of ~2.18%. For the second half of FY21, the company has declared a final dividend of 4.75 cents per share (40% franked), taking the total full-year dividend to 9.5 cents per share. The ex-dividend date for final dividend was 20 May 2021 and payment date is 24 June 2021. In line with its core principle of providing long-term, sustainable returns to its shareholders, AST has already announced FY22 dividend guidance of 9.5 cps. The franking for FY22 dividend will be determined when FY22 tax profile is confirmed. At CMP of $1.745, the company’s annual dividend yield stood at 5.42%.
Dividend Trend (Analysis by Kalkine Group)
EUR700M Subordinated Hybrid Issue: On 3rd March 2021, the company announced that it has successfully priced a EUR700M, 60-year EUR hybrid security issue in the form of non-convertible subordinated notes. These issuances will diversify the company’s capital base and will provide significant funding flexibility to fund the company’s significant growth pipeline.
Key Risks: The COVID-19 pandemic could affect the availability of certain sources of funds for the company, which could impact the company’s ability to refinance existing debt or raise new debt. 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.
Outlook: Looking ahead, the company is focused on growing and investing in its business and delivering value to investors, while pursuing growth opportunities. The company continues to invest in new technologies and expand its market presence, while selectively pursuing growth opportunities by connecting people with new sources of energy. As at 31 March 2021, the company had regulated & contracted asset base of $11.16 billion. AST is now targeting $13.5 billion asset base by FY26, comprising $11 billion of regulated asset base, $2.5 billion of contracted infrastructure assets. For FY22, the company expects its total dividend to be around 9.5 cents per share.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
Source: 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 period, 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. 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 can trade at some discount to its peer median P/E (NTM trading multiple), considering the decline in FY21 revenue and EBITDA, uncertainty surrounding COVID-19 pandemic, reduced FY21 dividend, while also taking into account the that the company has been trading at a discount in the past 3-years over its peer median. We have taken peers like Spark Infrastructure Group (ASX: SKI), Mercury NZ Ltd (ASX: MCY), Genesis Energy Ltd (ASX: GNE), etc., which comes under Utilities sector. Considering the company’s growing asset base, rising bottom-line, track record of paying decent dividend, current trading level, and valuation, we give a “Buy” recommendation on the stock at the current market price of $1.745, down by 0.286% as on 27 May 2021.
AST Daily Technical Chart, Data Source: REFINITIV
Note 1: The reference data in this report has been partly sourced from REFINITIV.
Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.
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