Spark Infrastructure Group

H1FY19 adjusted EBITDA increased by 1.9% on pcp to $426.4 Mn: Spark Infrastructure Group (ASX: SKI) is involved in investments in infrastructure businesses, primarily electricity distribution and transmission businesses in Australia. The company recently published results for six months ended on June 30, 2019 (H1FY19), wherein it highlighted that its adjusted EBITDA increased by 1.9% to $426.4 Mn as compared to the previous corresponding period (pcp). Its adjusted standalone net operating cash flow for the period increased by 10.8% on pcp to $144.4 Mn. Its distributions from investment businesses increased by 10.6% on pcp to $152.6 Mn. The Board of Directors declared an interim distribution for 2019 of 7.5 cps, with record date and payment date as on September 4, 2019 and September 13, 2019, respectively. The Board of Directors has also determined that the DRP will be reactivated for the interim 2019 distribution. The DRP will be used to partially fund the equity component of the acquisition and construction of the Bomen Solar Farm. Participating Securityholders will be issued Spark Infrastructure stapled securities at a discount of 2.0% to the price specified under the DRP rules.

Portfolio Performance:

Victoria Power Networks (CitiPower and Powercor): The EBITDA for H1FY19 reduced by 3.4% to $413.6 million and on an adjusted EBITDA basis reduced by 0.8%. Capital expenditure grew by 4.7% to $221.0 million, largely due to the continuation of the Rapid Earth Fault Current Limiters (REFCL) program. As a result, the Regulated Asset Base (RAB) grew 3.1% to $6,188 million from 30 June 2018.

SA Power Networks: The EBITDA for H1FY19 increased by 0.8% to $337.8 million whereas adjusted EBITDA increased by 3.9%. SA Power Networks’ semi-regulated revenues were up by 12.8% to $46.7 million. This increase was the result of higher public lighting works and increased asset relocation activity, partially offset by a decrease in council funded LED upgrades. Continued investment in the augmentation and maintenance of the South Australian network resulted in net capital expenditure of $222.9 million in HY2019, an increase of 7.3% on the previous half.

TransGrid: The EBITDA for H1FY19 increased by 7.5% to $352.0 million, majorly due to combination of increased transmission revenues and reduced operating costs. Unregulated revenue reduced by 8.9% to $74.4 million, which also saw a corresponding significant decrease in associated operating costs. Regulated capital expenditure increased by 22.6% to $124.3 million, mainly due to the commencement of the Powering Sydney’s Future Project and a major switching station project. Unregulated capital expenditure increased by 139.0% in the first half to $106.1 million due to a number of solar farm connections.
 

Half Yearly Income Statement (Source: Company Reports)

What to expect: As per the release, the company has reaffirmed distribution guidance for 2019 of at least 15.0 cps, subject to business conditions.The impact of the new Rate of Return Guideline (the RORG) and lower inflation will negatively impact regulatory returns for the upcoming five-year regulatory periods for SA Power Networks and Victoria Power Networks. Taking into account these regulatory and macro-economic headwinds, the company expects distributions to Securityholders will need to reset to a lower base for the next five-year regulatory periods.

Stock Recommendation: Spark Infrastructure’s share generated positive YTD return of 7.83%. Its EBITDA margin for FY18 stood at 52.8%, better than the industry median of 33.8%. Current ratio for FY18 at 2.34x was also better than the industry median of 0.84x, indicating a better liquidity position to address its short-term obligations. Hence, considering the aforesaid facts and current trading levels, we recommend a “Hold” rating on the stock at the current market price of $2.290 down 2.137% on August 27, 2019.

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