With interest rates and bond yields grinding ever-lower to record levels, and share market turbulence an ever-present threat, it is no surprise that the defensive sectors of the share market – A-REITs, infrastructure and utilities – have proven a popular haven.
The need for such a haven doesn’t look likely to recede any time soon.
Australia’s big five utilities – AGL Energy, APA Group, AusNet Services, Spark Infrastructure and DUET Group – have been viewed as a relatively safe source of strong yields, and indeed each has outperformed the stock market by a significant margin during the low-interest-rate period. But as always with the bleeding obvious on the share market, there is the risk of valuations becoming over-stretched. And there is always the factor of company-specific issues to be considered.
Here is the tale of the tape on the Big Five.
AGL Energy (AGL, $18.69)
Market capitalisation: $12.6 billion
FY16 consensus estimate dividend yield: 3.7%
FY17 consensus estimate dividend yield: 4.2%
Dividend franking: 100%
Analysts’ consensus price target: $19.57
Difference to current price: +4.7%
AGL Energy is the nation’s biggest electricity and gas “gentailer” – generator and retailer – with a generation portfolio that includes coal, natural gas, wind power and hydro-electricity sources, having exited the coal seam gas business last year. The stock has generated total return (capital growth plus dividends) of close to 11% a year over the last five years, and really got cracking over the last year, with a return of more than 30%.
AGL’s main energy assets continue to be coal-fired power stations, which produce about 12% of the electricity needed by consumers in eastern Australia. AGL’s Loy Yang power station supplies about 30% of Victoria’s power requirements. AGL also operates hydro-electric power stations in Victoria and New South Wales, as well as seven wind farms spread across South Australia and Victoria.
Last year, AGL committed to ending its use of fossil fuels for power generation by 2050. The company is currently building Australia’s largest utility-scale solar projects, in regional New South Wales.
AGL is considered to have a very strong business, with more than 3.7 million customer accounts. It has significant crossover: more than 84% of its household electricity customers are also connected to AGL gas.
Analysts expect AGL to grow its earnings solidly in FY16 and FY17, with dividend growth of 7% and 14% respectively projected by the analysts’ consensus. The dividend yields are lower than some of the other utility stocks, but they are fully franked, and on gross terms are close to the market’s average gross yield of 5.5% (FY16) and 5.9% (FY17). Importantly, the analysts’ consensus target price estimate implies that AGL is not yet fully valued, with capital growth upside of close to 5%, and a largely neutral-to-positive rating from brokers.
[1]Source: Yahoo!7 Finance, 23 May 2016
APA Group (APA, $8.98)
Market capitalisation: $10 billion
FY16 consensus estimate dividend yield: 4.7%
FY17 consensus estimate dividend yield: 5.0%
Dividend franking: nil
Analysts’ consensus price target: $9.38
Difference to current price: +4.5%
APA Group is Australia’s biggest gas pipeline operator, with 14,100 kilometres of high-pressure gas transmission pipelines across mainland Australia, transporting more than half of the country’s natural gas supply. About 75% of APA’s revenue comes from unregulated assets, with the balance from the regulated arena. But its average contract length is close to 10 years.
APA Group has a highly defensive earnings stream and a dividend yield in the region of 4.7%–5%. However, this is unfranked and thus falls short of the market’s average gross yield. APA has also been a strong performer over the last five years, generating total return of 24.5% a year, but has done it a bit tougher in more recent times, with just 4.7% growth over the last 12 months.
APA is on the acquisition trail. In March, it bought its former parent AGL out of the Diamantina Power Station in Mt Isa: about three-quarters of Diamantina’s capacity is contracted to Mount Isa Mines (owned by Glencore), which operates several mines, concentrators and smelters in the region. APA is also in the process of taking over the Ethane Pipeline Income Fund (EPX), which it manages: EPX owns the ethane pipeline that runs from Moomba in central Australia to Sydney, where it supplies the Botany plastics plant owned by Chinese-controlled Qenos.
In addition, APA Group and AGL Energy on a joint-bid for Australia’s fourth largest energy generator and utilities company Alinta Energy. If this succeeds, APA would take Alinta’s gas pipeline interests and power plants, such as those in the Pilbara that provide electricity to mining customers. This would provide growth for APA, but would increase the business risk.
Analysts are mostly positive on APA Group, with the consensus seeing scope for distribution growth of 10.3% this year and 7.6% in FY17. The analysts’ consensus also sees a bit of room for the APA share price to move higher.
[2]Source: Yahoo!7 Finance, 23 May 2016
AusNet Services (AST, $1.57)
Market capitalisation: $5.55 billion
FY16 consensus estimate dividend yield: N/A
FY17 consensus estimate dividend yield: 5.6%
Dividend franking: 100%
Analysts’ consensus price target: $1.57
Difference to current price: nil
Formerly known as SP AusNet, AST is a regulated utility that owns generation, transmission, distribution, metering and retail operations in both gas and electricity. The company is 51%-owned by cornerstone shareholders Singapore Power and China’s State Grid Corporation. AusNet has generated total return of 20% a year in total return over the past five years, with a 16.2% return for shareholders over the last 12 months.
AusNet’s major assets are three regulated energy networks in Victoria: the state’s main high-voltage electricity transmission network; an electricity distribution network; and a gas distribution network. With revenue being almost 90% regulated, it is relatively predictable, but there is the risk involved in regulatory resets.
With its financial year ending in March, AusNet recently reported a 4.6% rise in revenue for FY16, to $1.92 billion, and an underlying profit rise of 20%, to $326.2 million. Total dividend rose by 2%, from 8.36 cents in FY15 to 8.53 cents, which disappointed analysts.
AusNet wanted to grow by expansion, but a proposed bid for New South Wales grid owner TransGrid was effectively vetoed by its majority owners last year, when they blocked the equity raising to pay for it. Analysts see little growth on the horizon and they expect the FY17 dividend to be lower – giving little reason for the share price to rise. However, with full franking expected in FY17, AusNet Services should offer a gross yield of about 7.9%, which is not without its attractions in the current environment.
[3]Source: Yahoo!7 Finance, 23 May 2016
DUET Group (DUE, $2.33)
Market capitalisation: $5.62 billion
FY16 consensus estimate dividend yield: 7.7%
FY17 consensus estimate dividend yield: 8.0%
Dividend franking: nil
Analysts’ consensus price target: $2.31
Difference to current price: –0.1%
Gas and power grid owner DUET Group has earned security holders a total return of 16.6% a year over the last five years, but has struggled recently, generating just 5.2% in the last 12 months.
DUET is a diversified energy infrastructure investor, with a portfolio comprising majority stakes in three solid Australian regulated assets: the Dampier to Bunbury Pipeline (DBP), which is the nation’s longest gas pipeline; Victorian electricity distributor United Energy; and Victorian gas distributor Multinet Gas. Multinet and United Energy are regulated utilities, while the DBP mainly operates under contracts. Last year, DUET took over ASX-listed landfill gas and clean energy provider Energy Developments for $1.4 billion.
DUET’s portfolio of regulated utility and energy assets gives off stable and predictable cash flows. The company does have a growth angle, in that it recently announced that it would raise up to $230 million to buy out its partner in DBP (Alcoa of Australia) to move to full ownership. Gaining full control of the pipeline and its cash flows will lift both earnings and distributions: from a payout of 17.5 cents in FY15, analysts expect 18 cents this year and 18.6 cents in FY17. There is no franking, but the high yields thus engendered stand well above the market’s average gross yields. However, analysts’ consensus sees DUET Group as fully priced.
[4]Source: Yahoo!7 Finance, 23 May 2016
Spark Infrastructure (SKI, $2.19)
Market capitalisation: $3.67 billion
FY16 consensus estimate dividend yield: 6.0%
FY17 consensus estimate dividend yield: 6.2%
Dividend franking: nil
Analysts’ consensus price target: $2.16
Difference to current price: –1.4%
Specialist infrastructure fund Spark Infrastructure has been an excellent market performer, showing total return of 20.7% a year over the last five years, and a stellar 21.7% in the last 12 months.
Spark is a specialist investor in regulated Australian utility infrastructure. It owns 49% stakes in three electricity distribution networks: SA Power Networks (SAPN), the sole operator of South Australia’s electricity distribution network; CitiPower, which operates the distribution network that supplies electricity to Melbourne’s CBD and inner suburbs; and Powercor, the largest electricity distributor in Victoria, serving central and western Victoria and the western suburbs of Melbourne. Spark also emerged from the privatisation of the NSW-based TransGrid, with a 15.01% stake in the largest high-voltage electricity transmission network in the National Electricity Market (NEM). Spark also owns 10.6% of DUET Group.
Spark is coming out of regulatory reset periods in Victoria and South Australia and looks to have a dependable distribution outlook. Following a 12 cent distribution in FY15, analysts expect 13.1 cents this year and 13.6 cents in FY17, enough to justify prospective yields of 6% and 6.2% respectively, at the current share price.
However, investors should be aware that there is trouble in the camp at Spark, caused mainly by the TransGrid acquisition and its $735 million price-tag. The company narrowly escaped a so-called “first strike” shareholder rebellion over its remuneration report last year, and earlier this month shareholders voted 34.4% against adoption of the 2015 remuneration report, well above the 25% first-strike threshold. Activist shareholders had sought election to Spark’s board at the meeting, after campaigning against the company’s pay structures, debt levels and direction, but their bids failed. On top of this layer of uncertainty, analysts on consensus do not see any room for the share price to move higher – although it should be pointed out that Macquarie and Credit Suisse are bullish, seeing potential price appreciation of 12% and 7% respectively.
[5]Source: Yahoo!7 Finance, 23 May 2016
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