DUET Group (DUE) Update

DUET Group (DUE) remained MRE’s top pick in the regulated asset sector

DUET Group (DUE) - A Div upgrade in the pipeline?

DUE has recovered in recent times from it’s lows around $2.70 reached earlier this year during the depths of the credit crisis. DUE has recently broken through the $3.20 level where it has seen good support in the past, and the potential exists for the stock to kick from here. DUE presented at the recent Macquarie Emerging Leaders Conference, and we were presently surprised by the way the story is progressing.

Source: IRESS Daily

DUE reported that Stage 5A of the Dampier to Bunbury Pipeline (DBP) was completed on time and on budget for $660m. Furthermore DUE announced it has firm capacity requests to proceed with the $700m Stage B expansion. Somewhat unusually, capex is actually a positive for DUE. Lets look at why.

The fundamental valuation driver of the DBP is capex. Due to an agreement in place with the gas shippers, DBP earns a 14% internal equity rate of return on all capex spent on the pipe. Note that the equity return is post debt costs, with the latter being passed through to shippers. This provides DUE with a low risk, value accretive earnings stream from capex spent.

DUE noted their strong balance sheet with no major re-financing due until 2012, and the current debt hedged in line with the profile of its regulatory resets.

Furthermore, DUE has announced that they will pay a 13.5cps distribution for the half year. This is out of net cash available of 17.54cps and shows a dividend cover of 1.3X. MRE estimates that DUE could pay out an additional 1.5cps for FY08. While they view this quantum of upgrade as unlikely MRE is of the strong opinion that a DPS upgrade is likely prior to the end of FY08.

DUE remains MRE’s top pick in the regulated asset sector.