Lumo/IEA review in view of likely sale

Chris Timms
Chris Timms
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 consist of:

• 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 customer base.

• Direct Connect: 110,000-per-annum utility connections, valued using 10 times assumed operating profit equating to $80 million.

• 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 source.

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 2014.

''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 do.''

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 10.75c.

Mr Timms said Infratil was now trading at a deeper discount to its net tangible asset (NTA) price than he regarded as fair.

''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 recommendation.''


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