Spark Infrastructure reported a CY17 net profit of $89m, slightly above our $88m forecast and up 10% on FY16. CY17 proportionate revenue and operating earnings (EBITDA) were within 1% of our estimates. A final unfranked distribution of 7.625cps was declared, taking the full-year distribution to 15.3c.
We made the following observations regarding the result:
- Cash flow – The result was characterised by strong operating cash flow (OCF) from the company’s three entities, Victoria Power Networks (VPN), SA Power Networks (SAPN) and Transgrid. Rather than increasing returns to Spark, the entities retained cash to fund growth opportunities. As a result, capital expenditure increased, mostly in non-prescribed growth, with management indicating these opportunities offer better-than-regulated returns. Management reiterated CY18 distribution guidance of 16cps and suggested there would be further growth in distributions to 2020.
- Capital expenditure – Spark’s entities also increased their capital expenditure in CY17, by 14% at VPN, 37% at SAPN and 61% at Transgrid. More than half of the $1,187m spent in CY17 (100% basis) was on growth capex. Much of the analyst conference call with management was spent discussing further opportunities for growth, especially in providing connections for renewable energy. Returns on these projects are expected to be above regulated assets, reflecting the slightly higher risk of project delivery. Management indicated VPN and SAPN would manage to 75% of net debt to regulated asset base, with Transgrid slightly higher.
- Regulatory landscape – CY17 saw the finalisation of a number of policy decisions, including the limited merits review and the Australian Energy Regulator’s (AER) assessment of regulatory treatment of inflation. Matters to be resolved in CY18 include the AER's rate of return review, which is due by year end, and the Australian Competition and Consumer Commission’s review of electricity retail prices.
We have upgraded our recommendation on Spark to Accumulate from Hold and raised our target price marginally to $2.60 from $2.55, with growth from unregulated assets potentially providing further upside to value.