Company Overview: AusNet Services Limited (ASX: AST) is mainly involved in transporting electricity and distributing natural gas to residential and business customers. The company owns and operates Victoria's electricity transmission network, which is one of five electricity distribution networks in Victoria. AST is responsible for transporting electricity from generation sources into Victoria's five lower–voltage distribution networks. Through its commercial business, Mondo, AST provides a variety of energy and infrastructure products and services to its customers.

AST Details

Future Growth Supported by Growing Asset Base: AusNet Services Limited (ASX: AST) is a diversified energy infrastructure business in Australia, mainly involved in electricity transmission, electricity distribution, and gas distribution. As on 1 July 2021, the company’s market capitalisation stood at ~$6.7 billion. During FY21 (year ended 31 March 2021), the company faced several challenges due to the COVID-19 pandemic and rapidly changing external environment. In response to the pandemic, the company implemented several key initiatives, which include stopping several non-critical works and projects to minimise customer disruption, accelerating transformation program to improve the company’s operations and strengthening the balance sheet to take advantage of future growth opportunities. Despite the challenges, the company’s NPAT grew by 3.9% YoY in FY21, and it delivered a dividend outcome at the top end of its guidance at 9.5 cents per share.

Looking ahead, the company expects its transformation program to help it in adapting to the changing energy landscape and deliver improvements across its key strategic priorities. Further, the company is focused on maintaining strong capital management settings to successfully manage risks, deliver long-term shareholder value, and to pursue growth opportunities. AST is targeting to grow its asset base to $13.5 billion by FY26, comprising $11 billion of regulated asset base, $2.5 billion of contracted infrastructure assets.

Five-Year Summary (Source: Analysis by Kalkine Group)

Improved Operating Cashflow and NPAT in FY21: Due to several material items including $30.7 million impairment charge against the goodwill and certain software assets and $14.7 million of bushfire remediation costs, the company’s revenue and EBITDA were slightly impacted in FY21. For the full year, the company delivered revenue of $1,924.5 million, down by 2.7% on the previous year. EBITDA for FY21 stood at $1,154.6 million, down by 3.5% on FY20. Cash flows from operations grew by 17.2% YoY to $844.5 million in FY21. During the year, the company’s transformation program delivered $9.0 million of operating cost savings, which was offset by a $7.0 million increase in non-discretionary costs.  NPAT for FY21 stood at $302.1 million, up by 3.9% on FY20. Over the year, the company also grew its regulated & contracted asset base to $11.16 billion, up from $10.857 billion in FY20.

NPAT Trend (Source: Analysis by Kalkine Group)

Key Metrics: For FY21, AST 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. Current ratio for FY21 stood at 2.41x, up from 0.65x in FY20, demonstrating that the company has improved its ability to pay short-term obligations. Debt to equity ratio for FY21 stood at 2.70x, down from 3.12x in FY20. ROE for FY21 stood at 9.4%, slightly up from 9.2% in FY20.

Profitability Metrics & Liquidity Profile (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 59.56% 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 31.24% and 19.75%, respectively, as also highlighted in the chart below:

Data Source: Analysis by Kalkine Group

Change of Directors’ Interest: On 24 June 2021, one of the Company’s Directors, Alan Chan Heng Loon, who holds direct interest in the company, acquired 1,593 ordinary shares of the company at a price of $1.72 per share. Alan Chan Heng Loon now holds 59,280 shares of the company.

AER Released its Draft Decision on Transmission Revenue Review:  The Australian Energy Regulator (AER) is responsible of setting maximum revenue limit that a network business can recover from its customers in providing network services. AST, being a leading transmission network service provider in Australia, had submitted its regulatory proposal to AER for the five-year regulatory control period commencing 1 April 2022. On 30 June 2021, AER released its draft decision, as per which AST can recover $2,838 million in revenues from its customers in the 2022–27 regulatory control period. The revenue is 2% lower than AST’s initial proposal of $2,883 million, mainly due to two operating expenditure step changes (totalling $99 million). AER has requested more information about these step changes. Further, AER has approved a total capital expenditure of $752 million and total operating expenditure of $1,319 million. AST plans to submit its revised proposal in early September 2021.

Review Timeline (Source: Company Reports)

Track Record of Paying Decent Dividend: For the second half of FY21, the company has paid a final dividend of 4.75 cents per share (40% franked), taking the total full-year dividend to 9.5 cents per share, which is at the upper end of the FY21 dividend guidance range of 9.0 - 9.5cps. From FY16 to FY21, the company’s dividend grew at a CAGR of 1.93%. AST has already announced FY22 dividend guidance of 9.5 cps, demonstrating its focus on providing sustainable returns to its shareholders. The annual dividend yield of AST is about ~5.48% on a five-year average basis (FY17-21) and current dividend yield trades at ~5.41%. This implies that the company has been delivering decent returns to its shareholders over the last five years. This might help in attracting the attention of dividend-seeking investors.

Dividend Track Record (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to regulatory risks as the Australian Energy Regulator (AER) takes the decision on the price movements for the electricity and gas networks. The company is also exposed to COVID-19 pandemic as it 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.

Outlook: As per AER’s draft decision on AST’s 2022-27 transmission revenue review initial proposal, AST is allowed to recover $2,837.8 million ($nominal, smoothed) from its customers in the 2022–27 regulatory control period. AST is expected to respond to this in September 2021 and a final decision is expected by 31 January 2022. Looking ahead, the company is focused on accelerating growth and driving improvement across its key strategic priorities. The company’s ongoing transformation program is focused on improving efficiency across operations and reducing costs. For FY22, the company expects its total dividend to be around 9.5 cents per share. With its 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.

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 corrected by 4.59% 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 a slight discount to its peer median P/E (NTM trading multiple), considering the uncertainty surrounding COVID-19 pandemic and regulatory risks, decline in FY21 revenue and EBITDA, and 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 Mercury NZ Ltd (ASX: MCY), Genesis Energy Ltd (ASX: GNE), APA Group (ASX: APA), etc. Considering the rise in FY21 operating cash flow and NPAT, track record of paying decent dividend, expected benefits from the ongoing transformation program, current trading level, and valuation, we give a “Buy” recommendation on the stock at the current market price of $1.755, up by 0.285% as on 1 July 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 decision 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 Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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