Alintagas starts off well

We noted this company's listing in issue 3 of our GTS Report - which concentrates on smaller stocks. That was part of our regular float update, but in future we will be covering the company in this newsletter as a tribute to its solidity and dividend yield-bearing potential. This will come as no surprise to our regular readers, who know that we love big, clunky infrastructure investments like this one.

Revenue stream

One part of the business, Alintagas Networks, distributes gas to 58% of West Australian households, via about 10,500 kilometres of pipelines, which provides it with a stable, regulated revenue stream.

Alintagas Sales, on the other hand, sells gas to large, contracted clients, as well as to retail customers. It will be affected by the introduction of full competition in the gas industry in WA in 2002.

The fortunes of the two divisions hinge on quite different factors. The Networks division has its prices for carrying gas set by a legislated formula indexed to inflation. It does not need to compete for customers, because no one is going to build a second pipeline network. What matters is the weather – cold winters mean more demand. Alintagas Sales is a different story.

It is forced to fight for big customers and as of 1 July 2002, it will have to compete against all comers. It's a good thing, then, that the division has locked almost a quarter of its revenue into contracts that don't expire until 2005.

Of the other gas players listed on the ASX, we cover the Australian Pipeline Trust and Envestra. Alintagas bears a closer resemblance to Envestra, which is a pure distributor of gas, while Australian Pipelines is a transmission company. The difference is that transmission companies sit on much larger pipes than distributors, because they carry gas from producers to distributors, who then pass it along to customers. The advantage is that transmission networks resemble arteries and as such demand far less upkeep than the capillaries that distributors own. We therefore prefer Australian Pipelines in principle.

That said, Alinta is a great investment, much better than its Victorian cousin, Envestra. It is trading on a PER of 16.7 on forecast earnings of 16.3 cents in 2001, which is reasonable for a company that will grow earnings dependably over the years and is affected by accounting conventions requiring that its gas networks be depreciated faster than their real working lives would dictate.

In terms of operating cash flows per share, Alinta is trading at very similar valuations to the Australian Pipeline Trust, which indicates to us that it is fairly valued.

As with Australian Pipelines, it's the yield that should attract investors' attention – Alinta plans to pay out 18 cents this year, giving a yield of 6.6%, about 36% franked. The company anticipates paying fully franked credits from 2002.

Because of the nature of the assets it sits on, we think Australian Pipelines is a more attractive long-term investment than Alinta, but only just. Investors interested in a long-term play, with very healthy yields (and better franking credits than APA for the next few years) can ACCUMULATE.