Morningstar Equities Research

Morningstar Equities Research - SKT, ORG, IOF, ASL, FRE-NZ, GOZ, MHI-NZ and CSR, SEK, SUL, TNE on price change

Sky Network Television Limited SKT| ARPU Growth in Focus as Penetration Reaches Saturation Point for Sky TV

Morningstar Recommendation: Hold
Nachiket Moghe, CFA, Morningstar Analyst - 64 9 915 6776
We have reviewed Sky TV's core subscription business and retain our view that it has lower growth prospects than in the past, as subscriber penetration has reached saturation point. However, we also believe there are good opportunities to lift the average revenue per user, or ARPU, as subscribers upgrade to MYSKY (a personal video recorder). This should support ARPU growth going forward. The upgraded MYSKY box will be available to subscribers in November/December 2014 and will contain enhanced pay-per-view and video-on-demand features. We are anticipating revenue to grow by 4.7% per annum on average during the next five years, mainly driven by ARPU growth. Sky TV's capital expenditure is also expected to decline during the next five years as growth in its subscriber base slows, reducing the need to purchase decoders. As a result, we expect cash flow to improve going forward, potentially increasing the prospect of a special dividend.

We leave our fiscal 2014 and 2015 forecasts for Sky TV intact. We also maintain our fair value estimate of NZD 6.50. We view the shares as fairly priced with no medium-term catalyst to drive the share price higher. Our wide moat rating on the company remains. We also have a high uncertainty rating reflecting the fact that the Internet could be a viable threat to the firm's competitive position. Nevertheless, Sky TV generates a very high return on capital and is expected to continue to do so.

Origin Energy Limited ORG| Origin Looks Beyond Electricity with Upstream Gas Aspirations

Morningstar Recommendation: Hold
Gareth James, Morningstar Analyst - 02 9276 4583
Origin Energy's AUD 15.00 per share fair value estimate remains unchanged following its conditional sale and purchase agreement with Karoon Gas for a 40% stake in two Browse Basin oil and gas exploration permits. The permits are jointly owned with ConocoPhillips (40%) and PetroChina (20%), both of whom have step-in rights and could block Origin's offer. If the transaction proceeds, Origin will pay between USD 600 and USD 800 million, depending on project progress, to be initially funded with undrawn debt but subsequently refinanced via a AUD 1 billion rights issue "some time after" Origin's full-year result on 21 August. The equity issue will include about AUD 400 million to fund development of the Ironbark and Blackwatch coal seam gas projects in Queensland, with a final investment decision, or FID, expected in 2015 and production from about 2020.

The Browse transaction prices in a natural gas reserve of 3.25 trillion cubic feet equivalent, or Tcfe. If correct, the price implies USD 0.46 per thousand cubic feet equivalent, or mcfe, below the USD 0.57 per mcfe paid by PetroChina for its 20% stake in March 2013.

Uncertainty around the offer completing, the lack of official reserve and the early stage of development means we exclude the transaction from our fair value estimate for now. We expect an FID for the Browse assets to take at least three years with a further three years for development, assuming all goes to plan. The proposed AUD 1 billion equity issue represents just 6% of Origin's market capitalisation so even ascribing a zero value to the assets would have minimal impact on our fair value estimate. In reality, we expect the transactions will be value-accretive in the long term but await additional information before incorporating such assumptions into our valuation. Origin shares remain fairly valued and the transaction is too small to impact the medium uncertainty rating. Origin continues to lack a sustainable competitive advantage or economic moat.

Investa Office Fund IOF| Investa Office Fund Asset Sale Shows Investment Demand Continues Despite Soft Fundamentals

Morningstar Recommendation: Hold
Adrian Atkins, Morningstar Analyst - 02 9276 4508
Investa Office Fund sold one of its Melbourne office properties--628 Bourke Street--for AUD 130 million in late May, representing a 12% premium to forecast June 2014 book value. This shows investor demand for income-generating assets such as office properties remains strong, and is pushing up prices despite soft operating conditions. Prior to the sale, Investa Office Fund had materially derisked the property, with new leases increasing occupancy to 100% and extending the weighted average lease expiry from 2.3 to 6.8 years.

With conservative gearing of 29%, clearly Investa Office Fund wasn't a forced seller. Rather, it was offered a good price for a relatively low-quality asset located at the less popular end of Bourke Street. We understand the building was not being marketed for sale, and the company was approached by a U.K. fund manager shortly after getting occupancy to 100%. Following the sale, Investa Office Fund's gearing should be about 25%.

The sale will be dilutive to earnings per security given the asset's rental yield is well above Investa Office Fund's average cost of debt. This will mostly offset earnings accretion from the acquisition earlier in the month of 50% of The Piccadilly Complex, Sydney for AUD 194 million. We estimate the net impact of these transactions is an earnings increase of less than 1% for the fund on an annualised basis. We adjust our rental income forecasts. Additionally, we reduce our long-term interest rate assumption. Our fair value estimate increases 6% to AUD 3.30 per unit, with the stock looking fairly valued at present. There is no change to our view that the fund has a narrow economic moat, with its good-quality well-located properties benefiting from ongoing tenant demand and some constraints on supply.

The Piccadilly Complex comprises two office buildings on Pitt and Castlereagh Streets, connected by a two-level retail mall. The complex has a solid weighted average lease expiry of 5.3 years and occupancy of 93%.

Freightways Limited FRE-NZ| Fair Value Creeps Higher for Freightways but No Material Change to Our Forecasts

Morningstar Recommendation: Hold
Nachiket Moghe, CFA, Morningstar Analyst - 64 9 915 6776
We leave our estimates broadly intact for Freightways. However, we are lifting our fair value estimate to NZD 4.70 per share from NZD 4.40 per share, largely reflecting time value of money. At the current price, Freightways' shares appear modestly overpriced compared with our fair value and leave no scope for disappointments. We believe any potential slowdown in the New Zealand economy will impact valuations as the express package business (which represents about 75% of revenues) is inextricably linked to the economy. There is no change to the company's narrow-moat rating as Freightways strong market position in the duopolistic express package business creates significant entry barriers.

Ausdrill Limited ASL| African Joint Venture's Poor Performance Results In Ausdrill Earnings Downgrade

Morningstar Recommendation: Hold
Ross MacMillan, Morningstar Analyst -

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