* We review SKI's final result, due on February 22nd. Our expectation is for EBITDA of $596m proportionately consolidated, down 1.4% on pcp. We expect PAT to be down ~4.8% with higher depreciation adding to the decline albeit muted by a lower tax expense. Dividend of $0.056 has already been declared and management has guided to $0.091 in CY2011.
Impact
* CY2010 has seen a de-gearing of the balance sheet, resolution of the regulatory environment and implementation of the new SA regulatory regime. It is the new SA regulatory regime that has driven the lower earnings in the second half, with a step down in EBITDA from ETSA driven by smaller customer contributions. Likewise, growth at CHEDHA is likely to be more moderate as customer contributions wind back.
* Cashflow at SKI Hold Co is anticipated to decline ~30% on pcp to $100m. The principal impact has been lower dividends from the underlying assets as they continue to retain cashflow to fund the larger capital expenditure programs. This trend will continue in the coming 3-4 years. The unknown is the extent of the de-gearing. SKI is confident that this will not impact dividend growth from the new lower base, but the threat remains CKI seeks to lift ETSA and CHEDHA's credit ratings to A- on a standalone basis. Ultimately this limits dividend growth to drawing down Hold Co cash balances and DRP.
* SKI's management has articulated that it plans to lift disclosure at the final result to increase comfort over the debt profile and the time the underlying assets have on the pre-GFC spreads that are no longer available. Nonetheless, we expect an increase in the funding costs over time, reflecting newer debt at spreads of +250bp.
Earnings and target price revision
* We have renewed our model, resulting in an 8-12% lift in our previous EPS forecasts.
Price catalyst
* 12-month price target: A$1.18 based on a DCF methodology.
* Catalyst: Corporate activity
Action and recommendation
* We have downgraded to Neutral, with our target price cut to $1.18 per share (from $1.33). The lower target price reflects a discount of 15-20% against a takeover price for SKI net of exit fees. The approach is similar to TCL and CEU, with the constraint that there is no catalyst to have the value gap contract. Moreover, the de-gearing of the assets will ultimately constrain dividend growth or the quality. In the absence of a takeover bid, SKI offers only moderate value for investors, and thus our Neutral recommendation.
SKI Price at posting:
$1.14 Sentiment: Buy Disclosure: Held
