Is there Resilience in the Utilities Sector? Latest with Spark Infrastructure & APA Group

  • May 15, 2020 AEST
  • Team Kalkine
Is there Resilience in the Utilities Sector? Latest with Spark Infrastructure & APA Group

While looking at the sector breakdown of the Australian benchmark S&P/ASX 200 index, one would see that the Utilities (Sector) has only a 2% contribution. However, this sector forms an essential component of the Australian economy. This sector contributes more than $45 billion to the economy. Also, 105,000 people hold their jobs and 6,336 businesses trade in the sector.

The utilities industry is responsible for providing Australian houses with electricity, gas, water, as well as waste removal services. 

                         

As per the latest report released by KPMG on 5 May 2020, power and utilities sector entities are experiencing a major change to meet the shifting energy requirements. The energy suppliers are balancing a challenging set of demand from its consumers, regulators, market operators and personnel.

The sector has started implementing emerging technologies like smart sensors and data analytics capabilities to drive efficiency and simultaneously meet customer expectations for service, personalization, as well as control.

Further, the power and utility companies have started defining their significant infrastructure requirements across generation, transmission as well as distribution. It comprises of the addition of further renewable sources.

Apart from that, the power and utility companies are trying to acclimatise to new operating scenarios even as they have to achieve shifting regulatory regimes & dissimilar rules across borders.

If we look at the YTD performance of the S&P/ASX 200 Utilities, the sector has provided a negative return of 7.83%. However, the sector has shown improvement in its quarter to date performance by providing QTD return of 2.76%.

On 15 May 2020, S&P/ASX 200 Utilities was trading at 7,583.9 points, up by 0.87% (at AEST 12:56 PM).

In this article, we would be looking at two companies from the utilities sector and cover their latest updates.

Spark Infrastructure Group

Spark Infrastructure Group (ASX:SKI) is the owner of leading essential services infrastructure in Australia with $18 billion of total electricity network assets. It provides affordable, reliable electricity to more than 5 million homes and businesses in Australia and has over 5,300 employees.

     

                                                            Source: Company’s report

Recent Update; Release of the Macquarie Investor Conference Presentation:

On 7 May 2020, Spark Infrastructure Group released its Macquarie Investor Conference Presentation where it reported strong cash flow from the high-quality network businesses. The Company reconfirmed its FY2020 distribution guidance.

FY2019 Highlights:

For FY2019 ended 31 December 2019, the Company’s net operating cash flow improved by 15.7% to $379 million.

  • Regulated asset base improved by 2.9% to $6.2 billion.
  • Contracted asset base increased 301.2% to $260 million.
  • Distribution announced during FY2019 was $ 15 cents per share.

Spark During COVID-19:

The Company’s focus during COVID-19 has been the health and safety of its employees and at the same time, maintained essential services to its customers.                                                                                                                                

  • The Company noted a slightly higher operating expenditure due to adapted ways of working and lower capital expenditure resulted in lower labour recoveries.
  • There was also a drop in the energy demand across the National Electricity Market. In March 2020, the figures slipped 6.6% in New South Wales, 6.8% in Victoria and 11.1% in South Australia.
  • Energy Networks Australia announced a Network Relief Package at the start of April 2020, offered by the privately held networks in South Australia, Victoria and NSW to those customers who were impacted by COVID-19.

Spark’s Outlook:

  • Growth program for TransGrid is considerable; however, would depend on regulatory hurdles.
  • SA Power Networks (May 2020), and VPN (April 2021) regulatory determinations will provide certainty for the upcoming 5 years period.
  • Bomen Solar Farm construction is completed, and commissioning is under progress. It is expected that the commercial operations would start in 2Q2020.
  • SKI would keep monitoring developments as well as opportunities in contracted renewables generation.

Stock Information:

On 15 May 2020, the shares of SKI increased by 0.752% and was trading at $2.010 (at AEST 3:00 PM). SKI has provided an annual dividend yield of 7.52% and a PE ratio of 42.54x.

APA Group

APA Group (ASX:APA) is the largest natural gas infrastructure business in Australia and has a market cap of $13.21 billion as on 15 May 2020. It has asset worth ~$21 billion, 15,425 km transmission pipelines. 

         

Recent Update; Release of investor briefing day 2020 presentation:

On 8 May 2020, APA Group released its investor briefing day 2020 presentation where it highlighted about the company, its 20 years of growth & adaptation and more than $14 billion investment into the Australian energy market.

The long-term success of the company was driven by:

  • Growth in global energy demand.
  • Resilience of the low-risk business model over economic cycles.
  • Portfolio of superior long-life assets.
  • Strong skills & competence to sail through the constantly changing environment.
  • Operational and safety excellence.
  • Financial strength and flexibility.

APA Group During COVID-19:

  • APA continues to focus on its role to provide Australian with the important services of gas transportation & energy generation to keep them functioning. The Company is executing its business continuity plans & at the same time offering its customers’ energy requirements securely as well as reliably.
  • During the period, the Company was able to respond to the challenge.
  • APA expects that there might be an impact of the present situation on its near-term organic growth.
  • APA has adequate liquidity as well as available headroom with ratings metrics.

Energy Transformation:

The Company in the presentation laid stress on the need for ongoing investment of for energy transformation. These includes:

  • Coal to renewables & gas
  • Rooftop solar
  • Consumers selling into the grid
  • Electrification, e.g. EVs
  • Customers & technology

This transformation would require a holistic approach which includes:

  • Ambition to reduce emissions
  • Decarbonise demand
  • Power conversion
  • Balancing costs and technologies
  • Decarbonise supply

Growth Strategy:

  • Deliver services the customer value consistent with the Customer Promise
  • Grow its pipelines and midstream portfolio
  • Expand renewable & gas power portfolio
  • Secure North American investment
  • A deep research into technology transformation of energy
  • Preserve BBB/Baa2 credit rating.

A Glance at APA’s Target Sectors:

Stock Information:

The shares of APA have delivered a YTD return of 1.27%. On 15 May 2020, APA improved by 1.161% and settled the day at $11.33. APA shares have an annual dividend yield of 4.33% and a PE ratio of 43.24x.

Please Note: $ used in the article refers to Australian dollar unless stated otherwise

 


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