ASX Code: DUE
Security price: $2.27
Industry: Utilities/Energy
Forecast FY16 distribution: 18.0 cents per share
Diversified Utility & Energy Trusts, better known as the DUET infrastructure group, was constructed with the dividend-seeking investor in mind. Its portfolio of regulated utility and energy assets provides stable and predictable cash flows which are fully paid out as distributions to shareholders. These assets include energy transmission networks such as United Energy and natural gas assets such as Dampier Bunbury Pipeline, Multinet Gas and Energy Developments. The vast majority of the revenues derived from these assets are in the form of regulated tariffs. Though this exposes DUET to a degree of regulatory risk, because pricing is periodically renegotiated, it ensures lower volatility of earnings.
DUET’s valuation is based on its ability to grow future distributions and hence cash flow. At its first-half FY16 result, it maintained its distribution guidance of 18c per share in FY16, 18.5c in FY17 and 19c in FY18, a compound annual growth rate of 2.7 per cent over the period.
At current prices, this implies a yield of greater than 8 per cent, which compares favourably to bonds and other income securities. Having conducted a contribution analysis to the dividend, split by asset, I view these targets as achievable. The growing cash-flow contribution from Energy Developments will offset the declining cash flows from Dampier, supporting the modest distribution growth.
Energy Developments’ growth is made possible by DUET’s ongoing restructuring of the business, which has aimed to maximise its cash-flow contributions to the group. Since acquisition, net debt has been reduced by $150 million, boosting the credit rating and saving around $3.5m in interest expenses per annum.
What’s more, Energy Developments is now also receiving better hedged prices on its energy certificates, boosting cash flow as a result. This has been bolstered by several major contract renegotiations. A key benefit of the company’s growing contribution to the group is DUET’s ability to pay future distributions out of free cash flow.
DUET offers an 8 per cent yield, covered by reliable and predictable cash flows.
Damen Kloeckner is an associate analyst at Clime Investment Management.