AusNet Services: Closing time

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
12 November 2021, 9:30 AM
Sectors Covered:
Infrastructure, Utilities

  • AST released its 1H22 result, albeit it was a non-event given the agreed takeover by Brookfield.
  • The takeover is expected to be implemented in February/March 2022.
  • AST announced a 1H22 dividend of 4.75cps (unfranked and trades ex on 16 November), which will be deducted from the all-cash takeover price of $2.65/sh. Hence, we set our target price at (login to view). AST does not intend paying a special dividend before the takeover is closed.

Analysis

Management discussed the size and scale of the multi-year energy transition underway within the NEM and the electricity network investment opportunities arising from it. Unfortunately, with the takeovers of AST and SKI investors have no listed exposure to this structural growth. 

1H22 EBITDA declined -4% on pcp to $634m (or $654m with lease income). However, we deduct customer contributions which we view as a direct one-off contribution to capex.

On this basis, EBITDA declined -5% to $596m and narrowly missed our forecast of $606m. Earnings were impacted by declining regulated revenues and weather events. 

1H22 cash from operations declined -6% on pcp to $403m, beating our forecast $373m. The decline was mainly driven by lower cash EBITDA.

Capex lifted +4% on pcp to $393m, above our forecast $359m (capex is good in the world of regulated assets as it is included in the asset base for future return on and return of capital revenues).

Note though that $46m of this capex related to customer contributions. Also note the $59m of spend on Development & Future Networks including Western Victorian transmission and Moorabool battery.

As well as the low-return/low-risk earnings of AST’s core regulated networks business, we think AST’s takeover premium reflects the growth coming from contracted earnings related to this segment of AST.

The Regulated and Contracted Asset Base increased +4.6% on pcp to $11.3bn. Hence, the implied takeover multiple paid by Brookfield is 1.54x (vs 1.46x for Spark Infrastructure’s takeover).

Forecast and valuation update

Forecast changes are irrelevant given the agree takeover proposal.

Target price is lifted to (login to view) to align with the takeover consideration less the 1H22 DPS.

Price catalysts

Upside is now capped given the fixed takeover consideration.

Risks

The bid not proceeding. FIRB sign-off is the key government approval required, but given Brookfield’s consortium is Canadian and Australian funds we think it highly likely this approval will be received.

Shareholder approval is also required – 32.7% shareholder Singapore Power supports the takeover but uncertainty surrounds the intentions of 19.9% shareholder State Grid Corporation of China.

Extended delays in the deal’s completion. However, if the scheme is implemented after March 2022, AST shareholders will be entitled to additional consideration from Brookfield of $0.000260274 per share for each day after 31 March 2022 that has elapsed by the implementation date.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.


Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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