Spark Infrastructure: Interim result 2012

Spark Infrastructure announced a respectable interim result, with higher electricity prices offsetting flat demand to produce a 17% increase in underlying revenue to $154m. Spark’s board declared an unfranked distribution of 5.25 cents (ex date 30 Aug), and reiterated expectations for a full year distribution of 10.50 cents.

The collective revenue of the underlying infrastructure assets increased 9% to $1,042m, with operating profit increasing 16% to $635m. While regulated revenue increased 19% to $806m, less dependable unregulated revenue fell 18% to $103m. Both ETSA and CitiPower blamed higher electricity prices and an increase in solar energy usage for a 1.6% and 2.3% respective fall in electricity volumes. Given the rapidly falling cost of solar energy we expect this trend to continue.

Spark currently offers a forecast yield of 6.7%, with the distribution expected to grow 3%-5% per year until 2015 when the current regulatory pricing agreement and massive capital expenditure program end. This should produce a superior return to term deposits, particularly if interest rates fall further or the major banks stop competing aggressively for customer deposits. Regulatory negotiations will resume next year, but the new agreement could be less favourable to Spark if interest rates remain low or the regulators respond to claims of asset owners ‘gold plating’ their networks.

As long as management is determined to acquire new assets (potentially overseas) and dilute its stakes in reliable electricity infrastructure we’ll likely remain on the sidelines unless the security price falls significantly. The security price has increased 4% since 15 May 12 (Sell – $1.51) and we’re switching to AVOID.