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SKI

Why Is Spark Infrastructure Down 1.3% Today?

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

Spark Infrastructure (ASX: SKI) was down modestly today, after announcing a disappointing full year profit result that is down 12.2% on the previous year to $51.1m. The company has partial holdings in Australian electricity distribution networks and suffered from unfavourable regulatory changes that slashed margins across the industry.

Spark Infrastructure - down
Spark Infrastructure was down modestly, despite a broad market rally today, because of lacklustre full year results (Credit: Spark)

Underscoring the regulation focussed nature of the change, Spark Infrastructure actually recorded slight revenue growth but suffered from margin compression. The reason the company did not sell off further is that the adverse regulatory changes were already known to investors and largely priced in, meaning today’s result didn’t come as much of a surprise.

The CEO criticised the rate of return guideline implemented by the Australian Energy Regulator, which was introduced in a short space of time, as not accounting for current levels of market uncertainty and enhanced volatility. He described the regulatory process as inflexible and speculated that the current regulatory environment will delay urgently needed investments in energy grids across Aussie states. Dividends are down on the previous year, and some analysts believe a further dividend cut could be on the cards for this financial year.

Spark infrastructure holds $17bn of infrastructure around Australia and focusses on energy grids. The company aims to generate value for shareholders by investing in their existing portfolio, strategically acquiring new assets at attractive prices and building assets adjacent to current ones. By co-locating assets, the company can generate attractive synergies and increase their market power to some degree. The business is also investing heavily in renewables, which helps them address exposure to changes in regulation that could go against existing investments. They also have a focus on quality assets and aim to hold these for the long term. While a focus on quality seems like a no-brainer at first glance, it can reduce asset yields, so investors need to consider both sides of the equation before making a final investment decision.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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