dps (interim) 2009-10, page-21

MarkieMills,

I have gone long at $1.79. Half of 10c divi already accrued so I am looking at this more like a $1.74 on a 3 month time frame. I don't understand your risk-reward strategy going short on this one?

As the divi approaches over next 3 months support usually strengthens and shorters will tend to cover to avoid the double whammy of rising price and dividend hit. Historically was $1.68c in Mar 09 at the bottom of the market post cap raising so it hasn't exactly raced away during this rally. Support looks very solid at $1.70 for mine, given all utilities I watch are well up on last years prices and has been a floor price for 5 months now. Below that is very strong support at $1.60 so really your upside isn't much.

I have read a number of broker reports over last couple of months and most are positive with valuations between $2 - $2.75. The falling US$ and dash for cyclical alpha has left DUE in the shadows understandably enough, no sex here. That said it will likely stand up pretty well during a market pull-back compared to the high alpha stocks and maybe even gain from a continuation of the rotation into defensives from those well up on the bull run. Has some good assets and a sale of Duquene would burn quite badly.

The earnings and divi metrics are toward the top of the sector in recognition of slightly high gearing which has held it back to date, no secret there. However, it does have dependable contract and regulatory income so one might argue it can carry higher gearing than some others, it's around 66% now I believe (and over $200M cash on hand).

Finally, IMHO tomorrows crisis is usually different to yesterdays crisis, which was too high gearing and NO funding available. I see that liquidity is plentiful now and underwritten by governments, the big banks are chocka with reserves pumped in at near zero rate to be lent out. Only they are having trouble finding borrowers with low risk earnings streams with which to put it to work. I think that borrow at zero and lend as first secured to utilities with very good interest cover and other metrics is a no brainer. So much so in fact that ENV amongst others is now tapping the private US bond market directly as the big money over there is desperately seeking returns outside rediculously low coupon US govvie bonds. Point is that what looked too highly geared yesterday might be good enough tomorrow.

The only thing that makes them look a bit stretched might be the capex for their growth assets. If they hit the market with a cheap raising out of nowhere you are a winner but if they get by with retained earnings (above divis) and refinance then I suspect they are heading the other way. Maybe we will find out soon enough because they have been dancing around $1.79 support for a week now and about to hit the uptrend from Aug 09 up through $1.73 in Feb.


goodluck