AGL better placed to return capital after selling 50% of Macarthur to Morrison & Co
AGL Energy, Australia's largest listed renewable energy company, is better placed to return capital to shareholders after completing the sale of its 50% stake in the 420 megawatt Macarthur Wind Farm to HRL Morrison & Co, says brokerage First NZ Capital.
Funds managed by Wellington-based Morrison, which is also the manager for NZX-listed infrastructure investor Infratil [NZX: IFT], agreed to buy into the wind farm in southwest Victoria for $A532 million, or about book value. The remaining 50% is owned by Malaysia's Malakoff Corp Bhd, which bought its stake from Meridian Energy in June 2013, as it prepared itself for partial privatisation and exited the joint venture that built the project with AGL. At the time, Macarthur was described as the largest windfarm in the southern hemisphere.
Under the terms of the AGL sale to Morrison, AGL will continue to operate Macarthur on behalf of Malakoff and Morrison, and retains the rights to all renewable energy certificates and electricity output until 2038.
The sale is part of some $A1 billion of asset sales planned by AGL by the end of 2017, which it says will improve capital efficiency while preserving the company's BBB credit rating.
First NZ Capital described the deal as a "$A100 million cost of capital arbitrage." The offtake agreement through 2038 will cost about $A50 million a year, the brokerage says, resulting in a 7.2% internal rate of return, which amounts to a $A100 million net present value uplift versus its modelled AGL weighted average cost of capital of 9.3%, it said. AGL's gearing was 28.6% in full-year 2015.
"Expansion in operating cashflows coupled with a reduced investment outlook should see AGL de-gear substantially in the coming years," the brokerage said in a note. After the Macarthur sale, "we forecast gearing will fall to 21.5% by full-year 2017. This is below AGL's target range and below a benchmark BBB-rated entity – this points to an increase in distributions to shareholders."
Meridian was able to use proceeds from the Macarthur windfarm sale to return capital to its then 100% shareholder, the New Zealand government, before the sale of 49% of the company to private shareholders in October 2013.
First NZ Capital is forecasting an increase in AGL dividends of about 45% by 2017, complemented by on-market buybacks from 2017, it said.