Infratil would embark on a six-month strategic review of
Lumo/IEA with the likely goal of selling them, Craigs
Investment Partners broker Chris Timms said yesterday.
The assets of the second-tier Australian electricity supplier
• Retail: 525,000 customer base in Australia's National
Electricity Market (NEM), which Craigs valued at $A600
($NZ649) a customer, equating to $A315 million for the
• Direct Connect: 110,000-per-annum utility connections,
valued using 10 times assumed operating profit equating to
• 165MW peaking generation, which Craigs kept at a book value
of about $A136 million.
Infratil management indicated there was likely to be interest
from Australian domestic players as well as some offshore
interest, Mr Timms said.
Profit growth was not immediately evident, but there were
some positives for valuation purposes.
Direct Connect was set to push more customers Lumo's way. In
2014, just 10% of new customers came from Direct Connect,
while in the new financial year 42% were expected from that
Customer growth had returned in the final quarter of 2014, he
said. Lumo's customers had increased to more than 525,000 by
the end of March, up from 491,000 at the end of the 2013
financial year and 494,000 at the end of the first half of
''Market churn is down from 30% to 24%, which bodes well for
improved margins over time. Lumo's churn has dropped below
market average as it was negatively impacted by the success
of its competitors at door-knocking, which they now no longer
The company had put its gas book in place through to 2020.
While the company did not disclose pricing, Craigs assumed it
reflected the company's view gas prices were likely to rise
over the medium term.
Despite an impressive customer growth expectations for 2015,
generator IEA's operating profit was expected to fall
slightly, partly because of the method of acquiring new
customers, Mr Timms said.
In 2014, door-knocking contributed to 46% of new customer
acquisition, while in 2015 that would be just 6%. A
door-knocked acquisition cost was capitalised over two years,
while acquisition from a Direct Connect pass-through was
capitalised in the year of acquisition.
In 2014, there was $A12 million of capitalised costs, whereas
in 2015 those were expected to amount to just $A2 million.
''So the impressive expected growth in customer acquisition
actually hurts earnings in the near term,'' Mr Timms said.
Infratil this week reported earnings before interest, tax,
depreciation, amortisation and fair-value movements of $500
million in the year ended March 31, down from $528 million a
year earlier. Net profit jumped to $199 million from $3
million, driven by a net gain of $183 million from the sale
of Z Energy and valuation adjustments.
Infratil will pay a final dividend of 7 cents per share, up
from 6cps a year earlier and bringing annual payments to
Mr Timms said Infratil was now trading at a deeper discount
to its net tangible asset (NTA) price than he regarded as
''We see the potential sale of Lumo to be a catalyst to
reduce this. Due mainly to market price improvements in
TrustPower, we increase our NTA-driven target to $2.74 and,
seeing material upside potential, retain our buy