About: Spark Infrastructure owns equity interests in four Australian electricity networks across South Australia, Victoria and New South Wales. Its principal investments are a 49% holding in SA Power Networks (the sole operator of South Australia’s electricity distribution network), a 49% holding in CitiPower (Melbourne CBD and inner suburbs) and a 49% holding in Powercor (central and western Victoria and western suburbs of Melbourne). The remaining 51% of these three assets is owned by Cheung Kong (CK) Infrastructure Holdings, a publicly listed company in Hong Kong. Spark also holds a 15% interest in Transgrid, a high-voltage electricity transmission network in NSW and ACT.

Why it is in the portfolio: Spark provides the portfolio with an exposure to the Utilities sector, which acts as a diversifier to other more economically sensitive sectors and is generally a source of steady dividends. There are not many large/mid-cap companies in this sector listed on the ASX, and on a relative basis Spark appears more attractively priced than APA and AusNet when using forward EV/EBITDA as a measure of valuation.

Fundamentals: Spark trades on a 1-year forward P/E of 32x and forward EV/EBITDA of 16x (slightly above its long-term average of 15x). It has a debt-to-asset ratio of 35%, which is reasonable for a Utilities company, especially when compared to peers. Its 1-year forward dividend yield is 6.2%, with a corresponding payout ratio of 195% (not unusual for Utilities companies due to the amortisation of assets of their long life time)

What could go wrong: Like REITs, Utilities companies may be susceptible to changes in interest rates because investor’s demand for yield generating assets means Utilities can trade as ‘bond proxies’. Therefore, a shift higher in interest rate expectations would be likely be detrimental to SKI’s share price. Additionally, while attractive relative to peers, SKI’s valuation could be considered expensive by market standards, and could therefore be more susceptible to a re-rating down than the rest of the market.