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Morningstar | AusNet Reports in Line FY19; FVE Increased 3%

No-moat-rated AusNet Services’ EBITDA, excluding customer contributions, fell 2.5% to AUD 1.07 billion in fiscal 2019 as cost saving initiatives partly offset lower revenue. The result was close to expectations. We increase our fair value estimate 3% to AUD 1.70 per share on the time value of money and minor earnings revisions. At current prices, the stock trades 8% above our valuation. Fiscal 2019 dividends totaled AUD 9.7 cents per share, or cps, up 5% on last year despite lower earnings and cash flows. Guidance is for AUD 10.2 cps in fiscal 2020, representing a yield of 5.5% franked to around 45%.

The outlook is benign for the next couple of years on scheduled tariff increases, completion of unregulated projects and cost-out programs. However, the next regulatory resets for underlying assets will be tough and likely cause earnings to fall. The regulator continues to find new ways to reduce utility profits in an effort to improve utility bill affordability. Recent changes include lower allowed returns and lower allowances to cover tax. These changes will take effect following next regulatory resets: 2021 for the electricity distribution network; 2022 for the electricity transmission network; and 2023 for the gas distribution network. All assets will be hurt by lower allowed returns, while the electricity distribution network will be most impacted by changes to tax allowances.

Management is yet to quantify the impact of negative regulatory changes. We estimate dividends could fall roughly 10% in fiscal 2022, broadly similar to Spark Infrastructure. As with Spark, ongoing growth of regulated and contracted asset bases and cost-out initiatives should partly offset regulatory headwinds. AusNet’s regulated asset base, or RAB, should grow around 3% per year to fiscal 2022 and contracted assets should swell 50% to AUD 1.5 billion by fiscal 2024.

The high-voltage electricity transmission network was the best performer in fiscal 2019, with EBITDA rising 3% to AUD 390 million. Regulated revenue was flat while unregulated revenue increased modestly. RAB grew 1% to AUD 3.5 billion in fiscal 2019. Looking forward, we expect revenue grows a little over 1% per year on average for the next few years, until the next regulatory reset.

Adjusted EBITDA in the electricity distribution network fell 7% to AUD 458 million on lower reliability incentive revenue and lower metering revenue. Cost saving initiatives alleviated some of the pain, with EBITDA margin improving 40 basis points despite lower revenue. RAB increased 6% to AUD 4.4 billion, which will support future earnings. We forecast solid average annual revenue growth around 4% for the next couple of years.

Gas distribution adjusted EBITDA fell 4% to AUD 145 million on lower regulated tariffs. Tariffs recently increased 1.3%, suggesting a slightly better result in fiscal 2020. RAB increased 3% to AUD 1.6 billion. We forecast revenue increases by low- to mid-single digits per year for the next few years.

The unregulated business Mondo, formerly known as Commercial Energy Services, recorded 4% growth in EBITDA to AUD 63 million. This comes despite a 16% fall in revenue as the businesses transitions away from providing low margin maintenance services to third parties. Rather, the focus is on building, owning and operating unregulated infrastructure assets, typically transmission lines connecting new wind and solar farms to the grid. Having nearly reached its prior goal of getting to AUD 1 billion in assets two years early, Mondo increased its target to AUD 1.5 billion by fiscal 2024. This should be easily achieved given the huge scale of new renewable generation being built. We think Mondo is likely to generate good returns in Victoria, where AusNet owns the electricity transmission grid.

AusNet’s financial position remains sound despite deteriorating credit metrics. Gearing--measured as net debt to regulated and contracted asset base--rose 40 basis points to 67.1%. Adjusted net debt/EBITDA was 6.5 times, up from 6 times last year. Credit metrics are likely to deteriorate further but management expects gearing to remain below 70% to fiscal 2022. The dividend reinvestment plan will help.