Company Overview: Spark Infrastructure Group is engaged in investment in regulated electricity distribution and transmission businesses in Australia. The Company operates through four segments: Victoria Power Networks, SA Power Networks, TransGrid and Other. Victoria Power Networks holds interest in two electricity distribution businesses in Victoria, which include CitiPower and Powercor. SA Power Networks is the operator of South Australia's electricity distribution network, supplying approximately 856,000 residential and commercial customers. TransGrid connects generators, distributors and end users in New South Wales (NSW). It holds interest in the electricity transmission business, which include NSW Electricity Networks Assets Holdings Trust (NSW Electricity Networks Assets) and NSW Electricity Networks Operations Holdings Trust (NSW Electricity Networks Operations). Other represents the economic interest in DUET Group. The Company also invests in regulated water and sewerage assets.


SKI Details

FY17 Performance highlights: Spark Infrastructure Group (ASX: SKI) has reported a 4.5% growth in EBITDA to $791.5m for FY17 on the back of the revenue growth and some efforts on cost control. The capex had increased 26.7% to $469.0m in FY17 and the Regulated and contracted asset base (RCAB) grew 2.7% to $5,880 million, while the Net debt/RCAB fell 0.7% to 73.5%. Further, in FY17, the cash distributions from investment businesses were of $284.4m, with increased distributions from Victoria Power Networks offset, in part, by reduction in distributions from TransGrid due to higher retained cash flows to support investment in unregulated connections. The standalone net operating cash flow in FY17 fell 7.9% to $267.5m on the back of lower distributions from TransGrid. Overall, FY17 reaffirms SKI’s position as Australia’s leading ASX listed network owner and puts the company in a unique position to capture the emerging opportunities as a result of fast-moving innovations in both distribution and transmission. Further, due to SKI’s continuing strong financial and operational performance, the company is able to actively participate in the delivery of affordable energy solutions for the future of Australia. Additionally, SKI expects major opportunities in new energy landscape, due to the improved regulatory certainty and efficient transition to higher use of renewables.
 

FY17 Performance (Source: Company Reports)
 
Segment-wise Performance: In FY17, CitiPower and Powercor were reconfirmed in the latest benchmarking by the AER (Australian Energy Regulator) as some of Australia’s most efficient electricity distribution networks. The company in 2017 embarked on a Continuous Improvement Program, which identified and delivered further savings of $17 million that led to higher distributions to SKI. The Regulated revenues grew by 0.4% to $903.3m, which is in line with the regulatory determination. Furthermore, in 2017, Victoria Power Networks delivered a consistently strong EBITDA outcome. The Regulated Revenue rose by 0.4%, and the Regulated Asset Base increased by 2.8% of Victoria Power Networks in FY17. Victoria Power Networks is significantly driven by net capital expenditure, in part due to the new connections and augmentation requirements. Moreover, SA Power Networks is ranked by the AER as the most efficient electricity distribution network in Australia, on a whole of State basis, and No 3 against all distributors. In FY17, SA Power Networks performed strongly and increased the regulated revenues by 7.8% to $797.6m during the period. The increased unregulated revenue in 2017 is due to the higher major projects’ activity (mainly Electranet). SA Power Networks had maintained its focus on reducing costs and increasing efficiency and expects to generate benefits of $40m per year in both operating and capital expenditure. At the end of 2017, the Powering Ahead efficiency program had delivered recurring benefits of $8m p.a. Additionally, in FY 17, TransGrid’s regulated revenues closed in line with the regulatory determination, which fell 9.3% to $711.6m. This was positively impacted by outperformance of service level (network reliability) targets. In 2017, the unregulated revenues were up 30.5% to $66.8m due to the line modifications (and associated consulting services) as part of asset relocations and new connection contracts. TransGrid’s ACE efficiency program had achieved 9% gross savings in the 12 months to 30 June 2017; and has a continued focus on delivering a further 3% reduction in costs through to 30 June 2018, however, this is subject to regulatory outcomes. The AER has deemed TransGrid to be an efficient operator. In 2017, TransGrid submitted its regulatory proposal for the next 5-year regulatory period for FY2018-23, and the final regulatory determination from the AER is expected in April 2018.

Market Opportunity: The company’s investments in distribution and transmission would play a major role in the new energy landscape, where the multi-directional energy flows across a wide matrix of generators, storage points and end-users are fast becoming a reality, and the coal fired generation will be retired at an increasing pace. The group sees a lucrative market opportunity as NSW alone, needs almost 10GW of capacity over the next 20 years to replace ageing coal generation. With regards to large scale renewables, AEMO modelling shows that up to 25-30 GW of new wind and large-scale PV could be built in the NEM by 2037.

FY17 Final Distribution: SKI had paid an interim distribution of $128.3m to the shareholders in September 2017 for the first half year to 30 June 2017. This represented a distribution of 7.625 cents per security (cps). Furthermore, as per the guidance, SKI has declared a final cash distribution for 2017 of 7.625 cps. The final distribution will be payable on 15^th March 2018 and will include 3.55 cps interest on Loan Notes for the period and 4.075 cps capital distribution. The distributions are fully covered by both standalone and look-through operating cash flows. The full year 2017 distribution is 15.25 cps, which is in line with guidance and fully cash covered at payout ratio of 95.9%. Thus, the company in FY 17, has delivered higher distributions to investors due to the efficiency and productivity gains within its strongly performing investment portfolio businesses. However, SKI’s Directors have determined that the Dividend Reinvestment Plan will remain suspended.
 

FY17 Key Financials (Source: Company Reports)
 
Reaffirmed Distribution Guidance for FY18: SKI has also reaffirmed distribution guidance for FY18 of 16.0 cps, subject to business conditions. This represents annual growth of 4.9% on FY17, and supports the continuous growth seen over the years. Further, SKI expects that growth in distributions per security through to the end of the regulatory determinations in 2020, will be at least CPI. However, this is also subject to business conditions.
 

Growing Distribution per Security (Source: Company reports)
 
Future Outlook: SKI’s aggregated proportional regulated electricity revenues are expected to rise further, in which CitiPower will rise by 1.99% from 1 January 2018; Powercor will rise by 3.08% from 1 January 2018; SA Power Networks will rise by 2.40% up till 30 June 2018 and 2.90% from 1 July 2018; and TransGrid will rise by 1.66% up till 30 June 2018. Moreover, the strong pipeline of value accretive business opportunities will require TransGrid to retain additional cash to fund strong growth in unregulated capex (infrastructure connections) in 1H2018.

Position on Efficiency levels: For Victoria Power Networks, the AER (Australian Energy Regulator) ranked Powercor No.1 and Citipower No.2 for opex multilateral partial factor productivity in November 2017. Even the SA Power Networks ranked South Australia as No.1 distribution network by State for multilateral total factor productivity. SA Power Networks was No.3 against all distributors for opex multilateral partial factor productivity. The group delivered a further $40m p.a. benefits which had recurring benefits of $8 million p.a. in 2017, largely in a more efficient capital delivery for the segment. As per the TransGrid segment, in November 2017, the AER ranked TransGrid No.4 transmission network service provider for multilateral total factor productivity. ACE program has continued to deliver ongoing benefits with 9% gross savings achieved in the 12 months to 30 June 2017.

Stock Performance: The shares of SKI fell 6.2% on March 05, 2018 as the group traded ex-dividend. The stock has been down by 8.02% in the last three months while the recent result has pushed the stock up a bit. SKI is well positioned to take up opportunities that align well with the strategic vision and are financially compatible with the existing low risk asset profile. The group also tracks well in terms of its target of maximizing returns for shareholders over the longer term. Based on the foregoing and long-term potential, we give a “Buy” recommendation on the stock at the current price of $2.26
 

SKI Daily Chart (Source: Thomson Reuters)

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