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Fund manager drops DUET Group: should you sell your shares?

According to reports in the Fairfax Press, leading ethical investment fund Australian Ethical Investments Limited (ASX: AEF) has divested its entire stake in listed utility and energy assets trust, DUET Group (ASX: DUE), following pressure from the Climate Advocacy Association to cease investment in non-renewable energy. The sell down comes amidst comments from

The sell down comes amidst comments from Hunter Hall Investment Management that its two listed funds – Hunter Hall Global Value Ltd (ASX: HHV) and Hunter Hall International Ltd (ASX: HHL) – have  also reduced exposure to the fossil fuel sector as part of their ethical investment mandates.

Accordingly, with DUET on the chopping block for ethical investors, I think now is a good time to take a closer look at this diversified utility fund.

About DUET

DUET is a registered managed investment scheme, operating as a stapled structure comprising three companies and a finance trust. At the core of its operations, DUET Group is essentially a holding company, managing a portfolio of utility and energy assets.

Key DUET assets include a 66% interest in Victorian energy transmission network operator, United Energy Distribution, as well as 100% ownership of natural gas providers Multinet Gas and the recently acquired Energy Developments. The Group also invests in individual assets such as the Dampier Bunbury Pipeline; the only natural gas pipeline which connects the Carnarvon and Browse basins in Western Australia (in which DUET owns an 80% interest).

Financials

The benefits of DUETs investment choices are most apparent in its robust financial results. Given it acquires highly regulated assets, most of which derive revenues from predetermined tariffs, DUET experiences low earnings volatility. Despite this, acquisitions, operational efficiencies and organic growth allowed DUET to report a 31.4% increase to revenue in the six months ended 31 December 2015.

Net profit after tax was up a massive 420.5% to $98.9 million, with adjusted earnings (EBITDA) growing 56.2% driven by its acquisition of Energy Developments. Pleasingly, management shared the spoils with unitholders, declaring an interim distribution of 9 cents per unit and maintaining full year guidance at 18 cents per unit.

This places DUET on a very respectable distribution yield of 8% (unfranked), which is likely to grow over time as tariffs increase.

Foolish takeaway

Although ethical fund managers are backing away from DUET, its regulated assets provide it with predictable cash flows, making it a solid stock with defensive characteristics. Whilst this can give rise to regulatory risk, investors can take solace in management’s actions of pursuing growth through organic acquisitions and diversification of assets acquired.

A downside risk to DUET Group is its current level of debt, with group gearing sitting at 61%.

Despite providing an excellent mix of growth and income, investors might want to wait for a cheaper price before jumping in to DUET.

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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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