Spark Infrastructure
Recommendation
Those frustrated by the recent batch of broker-sponsored income securities should consider Spark Infrastructure. Annual revenue (Spark has a calendar year end) from the company’s three underlying assets increased 6.6% to $1.98bn, with underlying profit increasing 7.1% to $1.18bn. Spark’s board declared a final unfranked distribution of 5.25 cents (ex date passed), which was down from 6.82 cents a year earlier but up from initial guidance of 4.75 cents.
The distribution in 2012 is expected to increase to 10.5 cents, up from 10.0 cents in 2011, following some favourable regulatory outcomes. A 25% increase in capital expenditure to $845m in 2011 will also help, as it produces a regulated return from day one.
Spark’s investment in its three underlying assets is expected to compound at 14% per year until 2015, when they are expected to complete a massive expansion and upgrade of their respective electricity distribution networks. Distributions will grow more modestly at 3%-5% annually, due to the massive outlay and reinvestment of profits required. So investors should bank a growing forecast 7.8% yield while waiting for strong capital growth.
Spark currently enjoys a smorgasbord of attractive investment opportunities, which will eventually place pressure on its balance sheet. So we’re disappointed acquisitions are now on the menu. According to management, ‘Spark is now well positioned to assess further investment opportunities with a view to diversifying its portfolio – by asset class, geography or income stream.’
Spark is currently on the cusp of a downgrade, but we’ll consider increasing the prices in the recommendation guide in a full review later this month. The security price has increased 3% since 29 Aug 11 (Long Term Buy – $1.32), but we don’t want to be penny wise and pound foolish. LONG TERM BUY.
Note: The model Growth and Income portfolios own securities in Spark Infrastructure.