Business Strategy and Outlook
AusNet Services’ security price has risen in recent months in sympathy with Spark Infrastructure, after the latter received a takeover offer. While the two businesses are very similar, AusNet is 51%-owned by Singapore Power and China’s State Grid, which may deter any takeover approach. AusNet trades at a 16% premium to our unchanged AUD 1.70 fair value estimate, offering a distribution yield of 4.8% with modest growth potential.
As the owner of monopoly infrastructure assets, revenue is highly defensive but heavyhanded regulation rules out excess returns and thus an economic moat. Returns at its three regulated networks are reset every five years to ensure they aren’t overearning, with no meaningful ability to appeal decisions. Slightly better returns can be achieved by cutting costs below allowances set by the regulator. But cost allowances get trued up every five years and outperforming is getting more difficult as privatised networks get more efficient.
Company’s Future Outlook
Timing of the Victorian electricity distribution network’s regulatory reset was fortuitous. The spike in 10-year government bond yields in early 2021 resulted in an allowed return on equity of 5.1% for the distribution network for the five years to mid-2026, up from 4.6% in the draft decision. All else being equal, we estimate this translates to an additional AUD 100 million, or 2.6 cents per security, in earnings each year compared with the draft decision. Bond yields have since weakened but we expect them to trend higher over the long term, pushing allowed returns on equity higher.
For now, an allowed return of 5.1% isn’t too bad. While allowed return on equity has fallen from 7.5% in the prior period, we expect the 30% larger regulated asset base to drive a near 10% increase in average revenue for the next five years. The draft decision for the Victorian electricity transmission network uses a 5.3% allowed return on equity, but that will likely fall to 4.9% in the final decision later this year if government bond yields remain around current levels. That represents a significant fall from 7.1% in the past five years. Revenue, however, should get a boost from lower inflation forecasts and an expanded regulated asset base.
Company Profile
AusNet Services is a diversified energy infrastructure business, operating Victoria’s primary electricity transmission network, an electricity distribution network in eastern Victoria and a gas distribution network in western Victoria. Singapore Power owns 31% of AusNet, and China’s State Grid owns 20%.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Revenue in the first quarter increased 4% year over year to $9.7 billion. Once again, cloud services and license support drove the top line upward, growing 6% year over year and accounting for 76% of the firm’s sales in the June quarter. Additionally, adjusted operating margins for the quarter remained flat year over year at 45%, and non-GAAP earnings per share was $1.03, compared with our estimate of $0.94.
The company’s cloud business continues to perform well and grow as a portion of Oracle’s overall sales. Since the cloud business typically offers better margins than the firm’s on-premises business, we view this mix shift positively as the increasing cloud mix will help the company grow its profitability. At the same time, however, we remain aware of the intense competition in the database management market and maintain our fair value estimate of $65 per share. With shares trading around $87, we recommend waiting for a pullback before committing capital to the narrow-moat name.
Within the cloud space, management highlighted a recent Gartner report that reviews Oracle’s strong execution within cloud infrastructure. At the same time, we find it important to highlight that while Gartner positions Oracle as the number three player in the cloud infrastructure space, Amazon and Microsoft (the current number one and two, respectively) have built their cloud infrastructure business over many years. As a result, it’ll be hard for Oracle to displace these two cloud giants off their perches, as doing so would require companies to make cloud infrastructure decisions primarily based on database functionality.
Additionally, on the call, management stressed the outperformance of its MySQL offering, HeatWave, over Amazon’s and Snowflake’s MySQL offering. While we continue to think Snowflake boasts significant benefits over Amazon due to its customers’ ability to avoid vendor lock-in, we found it compelling that Oracle claimed it plans to make its MySQL product available on competing public clouds.
Company Profile
Oracle provides database technology and enterprise resource planning, or ERP, software to enterprises around the world. Founded in 1977, Oracle pioneered the first commercial SQL-based relational database management system. Today, Oracle has 430,000 customers in 175 countries, supported by its base of 136,000 employees.
(Source: Morningstar)
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
