what orbis has to say about hdf

Can be found on their website latest report. http://www.orbisfunds.com.au/reports/SMEF-QuarterlyReport2009Q3.pdf


HDF has two principal assets,
2,000 kms of underground gas
pipelines in Australia and an
investment in a UK water utility.
The gas pipelines include a link
between South Australia and
the gas fi elds in central Australia
and Queensland, accounting for
over 80% of HDF’s income and
value.
This pipeline is the only one
servicing the route and the only
way in which South Australia
can realistically get its gas supply.
Given the dwindling gas reserves
in the Bass Strait and growth in
Melbourne gas consumption,
gas is more likely to fl ow from
Adelaide to Melbourne than the other way round. Time consuming negotiations with hundreds of land
and native land title holders makes it diffi cult for a competing pipeline to be built.
HDF has some long-term contracts with large gas producers to transport their gas from the production
centres down to the South Australian markets. These contracts typically require the producers to pay a
fi xed amount for the use of the pipeline (even if they do not need it) which escalates by the Consumer
Price Index (CPI) every year.
Unlike many other utilities in Australia, HDF’s accounts give a fair refl ection of the underlying business
and its cash fl ows. The cash fl ows which HDF generates from its pipelines are sustainable, require no
fi nancial engineering and will grow with CPI given the nature of its contracts.
This year, HDF will earn and pay investors $0.10 per share from its pipeline operations. At the current
share price of around $1.00, this provides investors with a real income yield of 10% per annum. Given
current market levels, this offers excellent value in our opinion.
But there is more. We haven’t touched on HDF’s equity stake in the UK water utility. This utility is
highly regulated and has very high levels of debt which makes forecasting diffi cult. But the investment
has paid HDF $0.02 per share annually and there is no reason to believe that this will not be maintained.
Also, HDF does not guarantee any of the water company’s debt and so HDF’s downside is limited.
To summarise, HDF yields 10% per annum which is very secure and likely to grow by at least CPI plus
another 2% per annum which is likely to continue. In addition, HDF has spare capacity in its pipelines
and, together with new pipelines being considered, should also benefi t from growth in gas volumes.
Growth may well exceed infl ation over the next decade. In this market, we believe HDF offers excellent
value with far below average risk. HDF may well lag the market for a while as it continues to boom,
however we expect HDF to give investors annualised double digit real returns over an extended period
of time, something which very few shares do.