Duet's debt reduction trick

Painted as an expansion, Duet's infrastructure deal is more about degearing. Expect more of the same.

For a group once in Macquarie Group’s (MQG) infrastructure orbit, it should come as no surprise that Duet (DUE) has a stretched balance sheet.

As such, the “expansion” announced yesterday – to build a pipeline connecting Chevron’s Wheatstone LNG project to the Dampier Bunbury pipeline – is as much about reducing gearing as it is about increasing earnings.

The $100 million project, funded completely by new equity through a capital raising completed overnight, would be an unusual capital mix in ordinary circumstances for an infrastructure group.

The deal has been decreed a winner by most analysts who believe it will deliver earnings from the get go. But with a dividend payout ratio of 3,235%  for 2013, which falls to 169.5% this year, there is more than a good chance of further capital raisings in the near future.

Even after the raising, net debt will come in at $5.39 billion on shareholder equity of $1.59 billion with the stock priced at around 25 times forward earnings.

As a degearing strategy, this week’s expansion was quite innovative, adding earnings potential while simultaneously chipping away at the debt.

It was greeted enthusiastically by investors this morning with the stock rising 2.64% to $2.135, a handy premium to the bookbuild floor price of $2.03.

Duet has undergone some radical changes in the past year.

It last year bought out Macquarie and AMP’s management rights, which between them were siphoning off around $100 million a year in fees, to run the operation in house.

Conducted in two phases – including the recently completed simplification proposal – the pair were paid around $100 million to surrender management rights.

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