From Egoli.com.auMacquarie: DUE - Shares Rise Ahead Of...

From Egoli.com.au

Macquarie: DUE - Shares Rise Ahead Of Ruling
9/09/05


Shares in Diversified Utility (DUE) have steadily moved higher over the past six weeks ahead of the final regulatory decision on the United Energy Distribution (UED) network, due late this month. Macquarie Research Equities (MRE) continue to believe that there is upside available from the draft to the final decision and that a further positive distribution revision will be issued as a result.

In late July a tariff reduction of 22.7% was handed down to UED from the Essential Services Commission Victoria (ESC) at its recent draft decision. This was ahead of MRE’s forecast 17% reduction. What investors need to bear in mind is that the UED decision is a draft, not a final decision. Invariably a draft is always worse than a final decision. This was highlighted last time this asset came up for regulation five years ago when the draft decision called for a 16% PO adjustment. This was in turn reduced to a 13% drop at the final decision and ultimately down to a 9% cut following an appeals process.

Management recently stated that they expected distributions to be at least 22.5cps for the 2006 financial year (FY06). This is a 2.3% increase on the 22.0cps paid this year. Management expect to provide further guidance on the distribution outlook after the final regulatory decision for the United Energy Distribution networks.

DUE is trading below MRE’s $2.78 valuation and given the fact it offers a strong FY06 yield of 8.3% at current prices MRE retain an outperform recommendation.