Stocks’ Details

Spark Infrastructure Group

Sale of Stake in TransGrid: Spark Infrastructure Group (ASX: SKI) is a leading owner of a diversified portfolio of quality essential service infrastructure. The market capitalisation of the company stood at ~$3.96 Bn as on 20^th July 2020. Recently, the company noted that the sale process for the 19.99% stake in TransGrid held by Wren House to the Ontario Municipal Employees Retirement System (OMERS) of Canada has been completed. This transaction identifies the high quality of the existing business as well as the value creation opportunity in TransGrid. In the COVID-19 crisis, energy demand in the National Electricity Market (NEM) has witnessed a decline, with March figures reflecting reductions of 6.6% in NSW, 6.8% in Victoria and 11.1% in South Australia. The company added that the reduction in volume-related revenue is likely to be recovered in subsequent periods under revenue cap arrangements. The following picture gives an overview of SKI’s business profile:

SKI Business Profile (Source: Company Reports)

Distribution Guidance: For FY20, the company expects to pay a distribution of minimum 13.5 cps, comprising 7.0 cps for 1H FY20 and at least 6.5 cps for 2H FY20. Also, the company is likely to release its 1H FY20 results on 25^th August 2020.

Key Risks:  The energy industry is currently experiencing unprecedented change and uncertainty, which creates industry and regulation risk for the business. The company also deals with the financial market risk, which arises from the changes in market prices such as electricity price, foreign exchange rates and interest rates. These can affect the company’s income or the value of its holdings of financial instruments.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The objective of the company revolves around delivering long-term value through capital growth and distributions to securityholders from its portfolio of high-quality, long-life essential services infrastructure businesses. Net margin of the company stood at 29.0% in FY19 as compared to the industry median of 18.6%. This indicates that the company has decent capabilities to convert its top-line into the bottom-line against the peer group. We have valued the stock using a P/CF multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). Hence, considering the distribution guidance, a portfolio of high-quality, long-life essential services infrastructure businesses and decent capabilities to convert its top-line into the bottom-line, we give a “Hold” recommendation on the stock at the current market price of $2.300 per share with no change on 20^th July 2020.

Contact Energy Limited

June 2020 Operational Update: Contact Energy Limited (ASX: CEN) is engaged in generation and retailing of electricity. The market capitalisation of the company stood at ~$3.89 Bn as on 20^th July 2020. In the month of June 2020, the customer business recorded mass market electricity and gas sales of 447 GWh and mass market electricity and gas netback of NZ$101.03/MWh. The wholesale business recorded contracted wholesale electricity sales of 829 GWh. For the 12 months from July 2019 to June 2020, cumulative electricity demand stood at 41,236 GWh, which was down by 0.3% on the prior comparative period. Also, the company has recently appointed James Kilty as Deputy Chief Executive Officer and Jacqui Nelson as Chief Generation Officer.

Total National Demand (Source: Company Reports)

Future Aspects: The company is executing on a range of mitigation options, including co-funding an accelerated work programme by Transpower. This is likely to help move renewable electricity generation in the lower South Island north through the national transmission network. CEN expects to work towards reductions in costs and deliver strong returns to shareholders. CEN will release its FY20 results on 10^th August 2020.

Key Risks: The company’s business is exposed to material climate-related risks in the short, medium, and long term, such as emissions profile and new technology. The continued use of high emissions generation can create a reputational impact on the business in the short-term. Moreover, customer’s adoption of new technologies and/or energy-efficient solutions may impact the demand for grid-connected electricity.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company is focused on delivering on its transformation programme to reduce controllable costs, and capture value from scale efficiencies through geothermal development and leveraging its customer systems and lean operating model. Debt to equity multiple of the company stood at 0.43x in 1H FY20 as compared to the industry median of 0.46x. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in percentage terms). Thus, considering the expected reduction in costs and decent returns to shareholders, deleveraged balance sheet against the industry, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $5.470 per share, up by 0.923% on 20^th July 2020.

Cooper Energy Limited

Investment in Minerva Gas Plant: Cooper Energy Limited (ASX: COE) is an upstream oil and gas exploration and production company with a market capitalisation of ~$683.19 Mn as on 20^th July 2020. Recently, the company announced a $55 million commitment to support increased and new gas supply for south-east Australia. Cooper Energy (Operator and 50% interest holder) and Mitsui Group (50% interest) took possession of the Minerva Gas Plant in December 2019. COE and Mitsui Group would invest $37 million to upgrade the plant and have spent $17.8 million purchasing the plant and on front end engineering and design work and care and maintenance. This investment decision indicates an important milestone in COE’s continuing growth as a safe, competitive, efficient and reliable developer and marketer of new gas supplies for homes and businesses in south-east Australia. During the quarter ended March 2020, the company reported production of 0.28 million boe, up from 0.27 million boe in the previous quarter.

Key Financials (Source: Company Reports)

Guidance: For FY20, the company expects total production of around 1.2 million barrels of oil equivalent from its existing operations in the Otway and Cooper basins. COE anticipates capital expenditure in the ambit of $86 million to $93 million. The company has scheduled to release its Q4 FY20 and FY20 results on 20^th July 2020 and 31^st August 2020, respectively.

Key Risks: The company’s major activities are related to exploration, which is a speculative activity with an associated risk of discovery of oil and gas in commercial quantities and a risk of development. If the company is unsuccessful in exploration, this may create a material adverse effect on future business, results of operations and financial conditions. In addition, the company also deals with the risk presented by the global oil market and the Australian domestic gas market, which are subject to the fluctuations of supply and demand and price.

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

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Current ratio of the company stood at 2.70x in 1H FY20 as compared to the industry median of 1.06x. This reflects that COE is in a decent position to address its short-term obligations. EBITDA margin of the company stood at 63.8% in 1H FY20 against the industry median of 32.0%. We have valued the stock using the P/E multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Senex Energy Ltd (ASX: SXY), Z Energy Ltd (ASX: ZEL), etc., and arrived at a target price of low double-digit upside (in percentage terms). Therefore, considering the investment in Minerva Gas Plant, decent liquidity position, and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.420 per share with no change on 20^th July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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