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3 large-cap stocks in energy and infrastructure

Glenn Freeman  |  29 Aug 2017Text size  Decrease  Increase  |  

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As Prime Minister Malcolm Turnbull attempts to score points in the ongoing energy price debate, it's worth considering how these ASX-listed infrastructure and utility stocks are doing.

 

While our national leader attempted this week to re-focus attention on his plans for Snowy Hydro 2.0, these three existing players in energy retailing and transport infrastructure have recorded solid results during this earnings season.

For fiscal 2017, utility company Origin Energy (ASX: ORG) reported $2.53 billion in earnings before interest, tax, depreciation, and amortisation (EBITDA)--a 50 per cent year-on-year improvement. Underlying profit was up by a similar proportion, rising 51 per cent to $550 million for the FY17.

In non-adjusted terms, this equated to a loss of $2.23 billion in the year to June 30, due to a $3.1 billion impairment charge that included write-downs against its Australia Pacific LNG project, and conventional oil and gas assets.

Origin controls around one-third of the Australian energy retailing market, with electricity generation comprising the bulk of its profit. The company is not awarded an economic moat because its assets generally lack cost advantages, which is a key source of competitive advantage for both power producers and resource extractors.

While Origin doesn't provide guidance across the group, management tipped this core division would deliver EBITDA of between $1.7 billion and $1.8 billion in FY18. Morningstar senior equity analyst, Adrian Atkins, attributes Origin's rebound in underlying earnings in fiscal 2016 and 2017 to "stronger electricity performance, increased production from conventional gas fields and a reduced loss from APLNG as it ramps up".

However, he acknowledges the outsized impact its planned divestment of conventional gas asset, Lattice Energy, has on the result, without which "we estimate underlying earnings were up less than 20 per cent".

Morningstar increased its fair value estimate in response to the result, though the stock remains overvalued at current prices, as "it remains highly geared and susceptible to oil price swings," says Atkins.

"Origin's financial leverage remains too high and dividends look like they are on hold for at least another year," he says, anticipating a return to dividend payments from FY19.

Atkins downplays the potential of significant federal government intervention in retail energy prices, though expects increases in price-based competition and customer churn among the majors Origin, AGL Energy (ASX: AGL), and Energy Australia.

Tollways and airports

Outside the regulated utilities space, tollway and airport operator Transurban (ASX: TCL)--which holds a wide economic moat--delivered an encouraging FY17 result that was in line with Morningstar's expectations.

Underlying proportional revenue and EBITDA were each up around 10 per cent, to $2.2 billion and $1.6 billion, respectively. Unit-holders should receive a distribution of 56 cents a security in FY17/18.

"We're encouraged the economic conditions are conducive to ongoing growth in truck and car volumes, the pipeline of development projects appears attractive, and debt markets remain favourable," says Adam Fleck, regional director of research, Morningstar Australasia.

However, he notes growth across the network was mixed. Transurban's largest market of Sydney grew EBITDA 10 per cent, while Melbourne, and Brisbane each grew at a more subdued 5 per cent. The United States' segment was the group's strongest earnings performer, up 39 per cent "from a low base as these roads ramp up".

Toll revenue grew by 9 per cent in Sydney, to $872 million, while Melbourne disappointed slightly with toll revenue up just 4 per cent, though trips were down 1 per cent due to the CityLink Tulla widening project.

Brisbane toll revenue was up 23 per cent to $385 million, largely due to the Airportlink acquisition, with the existing network registering 6 per cent revenue growth and 2.3 trip growth.

Looking ahead, Fleck expects EBITDA growth of around 20 per cent in fiscal 2018, particularly as major upgrades in Melbourne are completed and truck toll increases take effect.

"Transurban's balance sheet remains sound. We believe the firm's highly resilient earnings support its heavy debt load," he says, acknowledging that "rising interest rates could prove a material earnings headwind in the medium term."

Tourism bodes well

Also within the transport infrastructure space, Sydney Airport (ASX: SYD)--which is awarded a narrow moat--posted its strongest growth in passenger numbers in 12 years in 1H17. This 7.7 per cent and 1.3 per cent increase in overseas and domestic passenger numbers, respectively, contributed to its $167 million interim net profit result.

Management upgraded its full-year distribution forecast to 34.5 cents a security, up from 33.5 cents previously. Around 21 million passengers passed through the airport in the first six months of 2017, according to AAP.

Morningstar moderately increased its fair value estimate after the result, and revised its full-year revenue outlook to 9 per cent, from 7 per cent.

However, while Fleck expects the airport will continue to attract new airline capacity, he believes "sustaining a high-single-digit international-traffic growth rate will prove difficult as the base number of passengers increases".

"Moreover, growth in scheduled passenger charges slows over the next five years, and we don't believe the double-digit retail spending growth experienced in the first half is sustainable," he says.

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Glenn Freeman is a senior editor at Morningstar.

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