AusNet Services: Forecast adjustments

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
15 October 2021, 9:00 AM
Sectors Covered:
Infrastructure, Utilities

  • We make a number of forecast adjustments in conjunction with our APA/AST merger modelling. 
  • HOLD retained with (login to view) target price as a result of takeover bids.   

Key takeaways and nuggets of information

We update a number of modelling assumptions. The resulting forecasts are used in our APA/AST merger modelling. 

Analysis

Modelling adjustments include: (1) applied finalised 2021-22 Electricity Distribution pricing which results in downgraded FY22 earnings;  (2) utilised AST’s revised Transmission  regulatory  proposal;  (3)  lower  controllable  and  higher  non-controllable costs than previously assumed, delivering earnings upgrades across FY23-27F; (4) updated  interest and inflation rate forecast deck (in line with the forecasts used on other infrastructure stocks under our coverage) which results in lower cost of unhedged debt and lower FY27+ regulated revenue growth; (5) heavier growth capex in Growth & Future Networks to align with targeted c.$1.5bn spend over FY22-26F, but with lagged increase in earnings related to this spend (we understand the lion’s share of the spend is on the Western Victoria project which won’t likely contribute earnings until c.2026); and (6) adjustments to tax payable modelling. 

Our  forecasts are  below  consensus.  We  think  that  is  partly explained by  our assumption that customer contributions revenue (contributions to capex) is not sustained at the level in FY21 and possibly by treatment of lease interest income. 

Excluding customer contributions, we expect FFO (EBITDA less net finance costs less current tax) to be relatively stable across FY22-26F averaging c.$790m vs $694m in FY21. FFO looks likely to benefit from reduced current tax being accrued across the period. Across this period, we expect AST to incur $4.5bn of capex. Given this profile, we assume DPS stays flat at 9.5 cps with the DRP running to drip feed equity into the capital structure.  

Valuation update

12 month target price set in line with the Brookfield all-cash offer of (login to view). 

Stand-alone valuation increased 12 cps to $1.96/sh due to forecast changes, implying 1.32 EV/RCAB.   

Investment view

HOLD given takeover activity currently underway with both Brookfield and APA Group bidding for the business.  

Price catalysts

An increased takeover price.  

Risks

The bids not proceeding or extended delays in an agreed deal’s completion.

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