AusNet Services Limited

AST Details

Inking of Scheme Implementation Deed: AusNet Services Limited (ASX: AST) is engaged in the transmission and distribution of electricity and gas. On 31 October 2021, the company has received a binding offer from Brookfield for the acquisition of all the shares at a cash amount of $2.65 per share. However, the company previously received an unsolicited, indicative, non-binding and conditional proposal from APA to acquire all of the issued shares at an indicative price with a notional value of $2.60 per share.

• The company unanimously recommended shareholders to vote in favour of the Scheme by Brookfield in the absence of a superior proposal and entered into a Scheme Implementation Deed (SID).
• As per the offer by Brookfield, AST has an equity value of $10.2 billion and an enterprise value of $17.8 billion. In the event of the implementation of the scheme, the shareholders of AST would get $2.65 cash per share, plus additional consideration.
• The offer price by Brookfield indicates a 34% premium to the undisturbed AusNet share price of $1.98 as on 17 September 2021 and a $0.30 per share increase to the $2.35 indicative price offered under the Brookfield Initial Proposal.
• On 15 October 2021, the Australian Takeover panel has released an order that no-talk restriction in the Confidentiality Deed will be of no force unless the Confidentiality Deed is amended to include a ‘fiduciary out’ in relation to the no-talk restriction.
• The order was released in relation to the application made to the panel by Australian Pipeline Limited as responsible entity of the Australian Pipeline Trust and APT Investment Trust (APA) with respect to the affairs of the company.

FY21 Financial Summary:

• Fall in Revenue and EBITDA: During the year, the company recorded revenue amounting to $1,924.5 million as compared to $1,977.6 million in FY20 and EBITDA stood at $1,154.6 million against $1,196.6 million in FY20, which was impacted by geospatial impairment of $31 million and prior year gifted asset adjustment of $19 million.
• Rise in Bottom Line: Net profit after tax for the year rose by 3.9% to $302.1 million backed by a decrease of $9.2 million in its easement tax obligation, the cessation of its material sales business in Growth & Future Networks in late FY20 for $16.2 million, and the prior year sale of inventory of $12.8 million to Downer as part of its transfer of electricity distribution maintenance functions.
• Dividend within Guidance: The company pleased its shareholder by providing a total dividend of 9.5cps for the year, which was within the guidance range of 9.0 - 9.5cps, franked to 40%.

Revenue & NPAT (Source: Analysis by Kalkine Group)

Key Risks:

• Competition from Peers: The company’s operational and financial health could be impacted by the rising market share of competitors.
• Climate Change: AST’s business is also exposed to a risk arising from the change in climate, which may cause rising emissions, and its operational health could be hampered.

Outlook:

• Looking forward, the company is focused on driving improvement in its key strategic priorities of customer passion, energised people, operational excellence, and accelerating growth. AST is also committed to maintaining strong capital management settings.
• The company expects to pay a dividend of 9.5 cps for FY22 and aiming for an asset base of $13.5 billion by FY26.

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: The company closed FY21 with $2.3 billion of liquidity, which comprised of $1.5 billion of cash & short - term deposits and $0.8 billion of undrawn bank debt facilities. The stock gave a positive return of ~40.27% and ~35.09% in the past three and six months, respectively. The stock has been valued using P/E multiple-based illustrative relative valuation and arrived at a correction of mid-single-digit (in % terms). The company can trade at a slight discount to its peers’ median P/E multiple, considering the COVID-19 uncertainties, rising cash cycle, leveraged balance sheet. For the purpose of valuation, peers such as APA Group (ASX: APA), Spark Infrastructure Group (ASX: SKI), Contact Energy Ltd (ASX: CEN), and others have been considered. Considering the expected correction, solid rally in the past few months, current trading levels and key risks associated with the business, we suggest investors to book profit, and give a ‘Sell’ rating on the stock at the current market price of $2.605, as on 01 November 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

AST Daily Technical Chart, Data Source: REFINITIV  

Note: The purple colour line in the chart depicts RSI (14-period).

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.

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