3 utilities hit by power prices and politics
The former prime minister isn't the only one to cop heat from the National Energy Guarantee last month, as power price regulations weigh on energy retailers' profits.
The former prime minister isn't the only one to cop heat from the National Energy Guarantee last month, as power price regulations weigh on energy retailers' profits.
Australian power prices and national energy prices proved political kryptonite for former prime minister Malcolm Turnbull late last month. The National Energy Guarantee also loomed large in the fiscal 2018 results of these large-cap utilities.
Regulated utilities have long been favoured by income investors, as one of two broad infrastructure segments, which also includes user-pay assets such as airports and toll roads.
Energy policy ultimately proved the undoing of Malcolm Turnbull's prime ministership
While the medium-term outlook for energy utility businesses faces government regulatory headwinds, it's not all bad news. Only one of the following Australian-domiciled companies endured a downgrade to its Morningstar fair value estimate last month.
Origin (ASX: ORG) posted $838 million in underlying net profits after tax for the financial year ending 30 June, doubling its 2017 result, but still undercut Morningstar's expectations.
The company, which controls about a third of Australia's energy retailing market, also announced a return to dividend payouts this financial year, though the final dividend wasn't declared.
Morningstar equity analyst Adrian Atkins says "it was a strong result with underlying net profit up 110 per cent," though he concedes the market didn’t like management's guidance for a 6 per cent drop in its utility business in fiscal 2019.
"We downgrade our near-term earnings forecasts in line with guidance, but remain comfortable with our $8 fair value estimate," he says.
Origin shares were trading at $7.76 at time of publication.
Better than expected
Spark Infrastructure's (ASX: SKI) FVE was also held at its current level, following a good first-half result that saw it "tracking a little better than we were expecting," according to Atkins.
Management reaffirmed its guidance for dividends for the full 2018 financial year after reporting an 18.9 per cent jump in first-half profits.
Dividends were also tipped to increase by at least the rate of inflation through to 2020-2.1
Spark owns 49 per cent of three electricity distribution networks – CitiPower and Powercor in Victoria, and SA Power Networks in South Australia. It also holds a 15 per cent stake in TransGrid New South Wales.
"All have secure, predictable, and regulated revenue streams, with pricing typically reset every five years," says Atkins.
While he slightly increased his full-year earnings forecast following its financial result, FVE was left at $2.40.
"Longer-term growth will be supported by ongoing investment in its networks, but regulatory attacks will cap profitability," Atkins says.
Wide-moat wears a downgrade
AGL Energy (ASX: AGL) – the only one of the trio Morningstar regards as holding an economic moat – saw its FVE downgraded 5 per cent to $20 a share, despite posting a strong full-year result that exceeded Atkins' expectations.
The narrow-moat-rated utility had a 28 per cent net profit jump in fiscal 2018, to $1.02 million. It also announced a final dividend of 63 cents per share, franked at 50.4 cents.
With management's outlook for net profit in fiscal 2019 relatively flat, "we downgrade our forecast by 8 per cent … on a lower wholesale electricity price and slimmer retail margins," Atkins says.
He points to "utility bill shock and intense competition" as driving "retail customer churn higher, with the firm being forced to increase efforts to maintain customer numbers".
"This was a major driver behind a 15 per cent increase in operating costs … in fiscal 2018."
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Glenn Freeman is a senior editor at Morningstar, based in Sydney.
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