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