Infratil Limited [IFT.NZX]

IRG

Monday 1st July 2013

Infratil Limited [IFT.NZX] owns infrastructure & utility businesses and investments in the United Kingdom, Australia and New Zealand. The Company operates in six segments.

They are Trustpower (renewable energy); Wellington International Airport; NZ Bus, Infratil Energy Australia (including Perth Energy), its non-renewable generation investment; Infratil Airports Europe.

Key Statistics
Shares on Issue:    586.23 mn
Open Price:          $2.21
Market Cap:         $1.295 bn
PE Ratio (ttm):       19.80
EPS (ttm):             11.21c
DPS (ttm):             9.2c
Div Yield (ttm):      4.16%
NTA:                     115.96c

Besides these the principal investment in corporate is the interest in Z energy. The Company acquired outdoor media company iSite from Wellington Airport in July 2011. Infratil was one of the world's first listed infrastructure funds when it was established and listed on the New Zealand Exchange in 1994. Its first investment was a minority stake in TrustPower.

It expanded into airport ownership in 1998 when it bought a 66% shareholding in Wellington Airport. Infratil was named Deloitte/Management Magazine Company of the Year in 2007.
*Key stats based on price on 1st July, 2013.

Performance
For the year ended 31 March 2013 Infratil reported Net Surplus was $3.4 million against $51.6 million last year. The decline reflects $62.4 million of costs and write downs associated with the two UK airports, from $37.3 million the previous year. Fluctuations in derivatives and other asset value changes amounted to a further net cost of $20 million from a net $23 million gain the previous year. Consolidated earnings before interest, tax, depreciation, amortisation and movements in the value of financial derivatives (EBITDAF) from continuing operations was $538 million compared with $510 million in the prior year. This includes Z Energy's contribution measured on a current cost basis adjusted for revaluations, impairments and realisations. Net cashflow from operating activities was $288 million up from $188 million in the prior year. Capital expenditure was $414 million up from $246 million. Infratil to declared a final dividend of 6.0 cents per share bringing the total dividend for the year to 9.25 cents up from 8.0 cents for the prior year.

•    Net Surplus down
•    Write down on foreign assets
•    EBITDAF increased
•    Operating cash flow increased
•    Dividend increased

Snowtown II Project
The most notable event for the period was commencement of Trustpower’s $550 million Snowtown II wind farm in South Australia. This is the largest investment ever undertaken by the Infratil group and is projected to provide an annual EBITDAF (Earnings Before Interest, Tax, Depreciation, Amortisation and Fair Value Movements) contribution of $99 million when fully commissioned. Funding a $550 million outlay requires a strong financial position and access to long-term capital on suitable terms. Australia requires more wind farms if it is to meet the policy goal of 20% renewable generation by 2020 and Trustpower has more consented sites. Capital expenditure for 2014 is expected to be between NZD 580-645 million reflecting TrustPower’s investments in Snowtown II. Therefore, the revenue and earnings growth in the medium term will remain restrained, however an increase can be expected from 2016 due to the full contribution of Snowtown II. Overall electricity output will be sold to Origin Energy under a 15 year power purchase agreement. The Australian government has set a renewable energy target of 45,000 GWh per annum by 2020.

Funding requirement of $550 million
EBITDAF contribution of $99 million after completion

Summary
Infratil is owner and operator of businesses in the energy (mainly renewable), airport and public transport sectors. The company´s biggest investment is in listed power company Trustpower, which is New Zealand´s fifth largest power company. Australia seems to be the market where Infratil, through its investments in Trustpower and Infratil Energy Australia, is looking for growth opportunities. Infratil released 2013 results that were in line with management guidance. Operating and free cash flows were up strongly driven by positive working capital movements. The commencement of the Snowtown wind farm is the start of a new stage of earnings growth for TrustPower. At present Infratil is actively involved with the sale of two assets; the exit from its UK airports and the more recently initiated market testing of the partial sale of Z Energy. The state of European markets has made the sale of the airports unpredictable and difficult. On the other hand, the latter process will run its course relatively quickly. If the eventual indications of value are satisfactory the transaction is likely to be concluded before 30 September 2013. If Infratil proceeds to a partial sell-down of its holding in Z Energy, or other major asset sales take place, the Company is likely to have additional capital flexibility.

Investment Merits
•    Higher natural resources will increase electricity production and earnings.
•    Trustpower carry on delivering good results.
•    Growth in visitor number will benefit Wellington Airport & NZ Bus.
•    Demand of future energy consumption in Australia.

During the year $57 million of Infratil infrastructure bonds matured and $111 million were issued to mature in 2018. As at 31 March 2013 net borrowings by Infratil and its 100% subsidiaries was $364 million, from $363 million at the start of the year. The 100% Infratil group had dated debt (excludes perpetual bonds) as a percentage of debt and equity market value of 39%, down from 42% in the prior year.
Looking forward, the management indicated that for the financial year to 31 March 2014 Infratil's earning and cashflow guidance is:

➢    Consolidated EBITDAF from continuing operations $520-$560 million (compared with $536 million in the current year). In both cases including Z Energy's contribution measured on a current cost basis adjusted for revaluations, impairments and realisations.
➢    Consolidated operating cash flow $250-$280 millionfrom $288 million in the current year.
➢    Investment spending of $580-$645 million, up from $414 million (includes 100% of Z capital expenditure).

Investment Risks
•    Slow demand growth in electricity sector.
•    Failure to deliver expected results from Snowtown II.
•    Challenging global economy may affect tourist inflow.
•    Slow growth of Australian economy

The EBITDAF outlook is consistent with last year and reflects softer expectations from TrustPower and Infratil Energy Australia. In both cases EBITDAF is expected to improve after the 2014 financial year as both companies are investing in assets or operational capability.

In conclusion it can be said that Infratil looks like a company with strong financial stability which is investing heavily in to future. The share price have increased by 11.39% in the last one year and rated “outperform” by analysts as reported by Reuters. Infratil shares may not see immediate gain in the near future but the investments made in respect to capital expenses will bring strong earnings in long term. Ideally this will suit long term investors with medium appetite for risk.

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