Shareholders of pipeline owner DUET Group (ASX: DUE) have had a relatively mundane day following the release of its FY14 report today. Here are some key points to note from today's report:
- Bottom line net profit before one-off items was flat at $81.2 million, compared to $81.7 million in FY13
- Net profit after one-off items surged to $193.1 million from $19.6 million last year
- Revenues dipped by 2.5% from FY13
- A final FY14 dividend of 8.5 cents per share was announced, bringing its total dividend for the year to 17 cents per share, partly in line with expectations
What do these results actually mean?
Investors may be stunned by the whopping increase in DUET's net profit after tax. However, when we compare results from year-to-year it's important to understand the underlying reasons behind the changes and in DUET's case, FY13 had been a relatively unstable period.
DUET's extremely low profit position in FY13 can be primarily explained by many one-off items such as changes in the fair value of its derivatives. Furthermore extraordinary costs in FY13 partly accounted for the 22.9% fall in operating expenses this year.
DUET's fall in revenues was also a direct result of lower Damper-Bunbury Piplline customer contributions and weaker performance in its Multinet Gas business, which resulted in a 9.9% reduction in distribution revenues. These businesses heavily weighed down growth in its United Energy business which saw revenues increase by more than 6.8%.
What now?
Following these results, management remains very optimistic about DUET's future and I'm definitely on board with them.
By far, DUET's most positive outcome of this year has been the successful re-contracting of a majority of its gas transportation contracts on the Damper-Bunbury Pipeline in Western Australia. This provides DUET with much more certainty when it comes to its lagging revenue stream and in its latest financial report DUET confirmed that these renegotiations are likely to aid revenues until 2021.
Furthermore, DUET has also inferred that it will continue to manage its cost base. These endeavours have materialised into a 29% reduction in head office costs in FY14. DUET is likely to see may more cost reductions to effect efficiency improvements.
Despite management calling DUET's annual report "a solid set of results", I'm not that impressed.
However, given the fact that its contract renegotiations and cost improvements are likely to provide it with some long-term tailwinds the price-to-earnings ratio of 32.03 may not seem so high. If investors can establish a cheaper entry point it may be a business to consider.
