SPAusNet – CIMB

Steady as she goes

Core within expectations. 1H09 core net profit of A$122.5m (+2.4% yoy) constitutes 66% of our FY09 forecast and 68% of consensus. This is within expectations as 1H is seasonally stronger. Revenue grew 8.9% yoy to A$636m, driven by favourable price changes with recent regulatory price resets, higher volumes on increased customer connections and higher usage stimulated by favourable weather. EBITDA margins rose to 47.7% from 45.7% a year ago on improved cost management. An interim distribution per stapled security of 5.927 A cts (+2.6% yoy) was declared, payable on 18 Dec 08.

One-off adjustment. 1H09 accounts include a one-off non-cash impairment adjustment of S$30.3m after tax. This was due to a revised timetable by the Victorian government for the rollout of smart electricity meters by end-2013. Management has prudently taken an impairment charge for existing meters, as well as accelerated depreciation for these meters of A$7m per year until Mar 2014.

No debt refinancing obligations until 2011. SPN had refinanced its obligations in early 2008, and will not have further refinancing obligations until 2011. While it may potentially miss out on benefits should interest rates fall, management’s long-term objective is to manage its long-term cost of debt, rather than be opportunistic.

Outlook. SPN has locked in 100% of its regulated revenue until 2011, representing over 90% of group revenue and providing highly predictable cash flows. So far, it has not detected any weakness despite the bleak economic situation. Meanwhile, reductions in management performance fees, a new relationship with Jemena (100% owned by Singapore Power Int’l) should improve profitability from 2H09 onwards. Another potential growth area is SPN’s non-regulated services like testing, metering and communications support.

Core forecasts maintained; maintain Outperform. We have adjusted our forecasts for the one-off impairment charge but maintained our core net profit forecasts. With the volatility of the A$-S$ rates in past months, we now peg A$-S$ at parity, which translates to a new DCF-derived target price of S$1.44 (WACC 10%), from S$1.71 previously. SPN is well supported by an attractive yield of over 10%.

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