By Gavin Madson
Last week, infrastructure company Envestra announced another solid result and with its balance sheet considerably stronger than before the GFC, it may be in line for a credit rating upgrade.
Improved gearing
As we noted previously, the debt to regulated asset base (RAB) ratio is the key metric we look at when analysing infrastructure assets, and Envestra’s ratio has improved considerably since before the GFC.
From a high of 95% in 2007, the debt to regulated asset base ratio has improved considerably and now stands at 82% (with a forecast ratio of 80% for 2012). Whilst this key ratio has improved considerably over the last four years, the company’s credit rating has remained stable.
Whilst the company’s cost of debt has increased on the back of wider spreads post GFC, which have in turn had a negative effect on coverage ratios, the undeniable truth is that the balance sheet (and the key debt to RAB ratio) has improved immensely. However the credit rating has remained stubbornly stable.
Envestra’s gearing improvement is a result of an increased focus of funding capital expenditure through retained cash flows (ie, lower dividends) and equity injections, rather than debt funding capital expenditure as was the case in the lead up to the GFC.
Whilst there remains a fair amount of volatility in credit market spreads, a one notch upgrade to the credit rating should be worth 10-20 basis points for investors.
Another year of strong results
Beyond the gearing, Evenstra’s full year results continued its recent positive trend with net profit after tax up 21% on the prior year. Increased customer connections and gas volumes drove revenues higher, which combined with cost controls allowed underlying profit to grow at 31% above last year’s result.
The purchase of Country Energy’s gas business during the 2011 year should see results grow again in 2012 after a full year of revenue contributions and efficiencies post purchase are realised. Further, with the Final Regulatory Decision handed down by the Australian Energy Regulator for Envestra’s Queensland and South Australian assets, regulatory risk for the company has decreased considerably over the last 12 months.
For these reasons we continue to see value in the Envestra bonds, and they remain one of our preferred infrastructure investments. In particular, we see exceptional value in the Envestra inflation linked bonds.
The inflation linked bond yield quoted above is a ‘real’ yield ignoring inflation. Using an assumption of 3% inflation, yield would become 8.25%. The coupon spread is ‘fixed’ but will fluctuate with inflation. All pricing is as at time of writing, please speak to your FIIG dealer for current pricing offer.
All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities.”
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