Security price: $2.41
FY1 value: $2.62
Industry: Utilities
FY1 distribution: 15.25c a security
Since we last featured Spark, the infrastructure investor, in this column in October 2015, it has risen 23 per cent and paid 6c a share in dividends.
It has been a stellar performer in many income-based funds and, given recent upgrades to its distribution forecasts, upside remains.
Spark is a specialist fund that invests in regulated utility infrastructure in Australia and overseas. This primarily consists of electricity and gas distribution assets, and regulated water and sewerage assets, all of which offer relatively reliable and low-risk cash flows. Spark’s portfolio consists primarily of minority (49 per cent) stakes in three electricity distribution companies: SA Power Networks, CitiPower and Powercor.
Electricity demand is a primary driver of revenue at all three of Spark’s major underlying assets. Thus, colder weather, population growth, economic activity and the building cycle all determine cashflows. Investors cautious about the possibility of lower regulated rates on electricity distribution at the next price reset may seek a greater margin of safety when considering investing. But should prices fall, Spark’s high cash coverage of distributions eases any strain in sustaining distribution growth.
The importance of Spark’s comfortable cash coverage was highlighted recently when it used the proceeds from the sale of its 10.6 per cent stake in Duet Group to pay down debt. This created a cash surplus, allowing it not only to absorb a regulatory pricing reset but support upgrades to its distribution guidance.
Assuming Spark meets guidance, we now derive a financial 2017 value of $2.62. It is a defensive yield stock with predictable, slow growth that should largely track inflation. We believe it is trading at a discount to value because of lingering concerns about electricity load volume in an unusually mild winter.
Spark is a premier yield stock that continues to deliver stable, cash-backed distributions against a simplified, focused operating model. It is conservatively leveraged and is supported by sustainable cash flows driving medium-term dividend growth of 5 per cent.
Damen Kloeckner is an analyst at Clime Investment Management. Disclaimer: Clime Asset Management owns shares in Spark.