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Summary Ausnet’s performance doesn’t seem to improve, and the high capex (sustaining + growth) results in a free cash flow negative result. Despite being FCF negative, Ausnet has actually increased the dividend, attracting more income investors. The dividends are currently borrowed by issuing more debt, but with a net debt/EBITDA ratio of in excess of 5, it might be locked out of the debt markets. I still prefer to sleep well at night, and I’m not taking a stake in Ausnet. Introduction Back in June, I warned investors Ausnet’s ( OTCPK:SAUNF ) dividend was at risk because the company had to borrow cash to fund the dividend payments. That’s a red flag for me, and even though a large part of the capex was growth capex, I still don’t feel comfortable investing in such companies. SAUNF data by YCharts Ausnet is an Australian company and you should most definitely use the Australian Stock Exchange to trade in the company’s shares. The ticker symbol in Australia is AST, and the average daily volume is approximately 3.25 million shares while the daily dollar volume is almost $4M. The H1 revenue jump was nice, as was the net profit result The top line looks really good, considering Ausnet was able to increase its revenue by 10% to approximately A$1.07B ($770M). In fact, the income statement looks really good, as not only did the revenue increase by a double-digit amount, operating expenses also fell by approximately 3%. While this doesn’t sound like a big deal, these two factors allowed Ausnet to increase its operating income from A$340M ($245M) to A$455M ($327M), a 34% increase compared to the first semester of the financial year 2015. (click to enlarge) Source: Financial statements The (much) higher operating income also led to a higher operating margin, which increased to 42.5% compared to 35% in H1 2015. The finance costs increased, which is directly due to the fact Ausnet had (and still has) to issue more debt to cover its dividend payments. Thanks to the higher operating income and despite the higher interest expenses, the pre-tax income increased by in excess of 50%. Additionally, the tax bill is much lower as well, resulting in a conversion of last year’s net loss into a net profit. The EPS was almost 11 cents per share. (click to enlarge) Source: Financial statements That’s good, but once you turn the page to have a closer look at the cash flow statements, you’ll start to see why I’m quite worried about Ausnet’s ability to cover the ongoing dividend payments. The operating cash flow was approximately A$284M ($203M), but this still wasn’t sufficient to cover the A$350M ($252M) capex. Yes, the negative free cash flow was lower than in H1 2014, but it’s still negative. And yes, some of the capex is growth capex and doesn’t impact the “sustaining” free cash flow, but still… But the cash flow doesn’t cover the dividend payments Based on the headline numbers, the free cash flow was negative as the total capital expenditures were higher than the incoming operating cash flow. And it doesn’t look like Ausnet is planning to slash the dividend to reduce the total cash outflow from its balance sheet. It has declared another dividend of A$0.04265 per share ($0.03) payable in December, and based on the current amount of outstanding shares, this dividend payment will cost the company almost A$150M ($107M). So I’m worried about Ausnet’s ability to continue to pay a dividend. And I’m not alone with this view. The Royal Bank of Canada (Nov. 18): Dividends are aggressively positioned and balance sheet is going to come under pressure if AST wishes to retain an A range rating. (…) We believe AST has an unhealthy reliance on the dividend re-investment plan to fund capex. And Deutsche Bank (Nov. 18 as well): AusNet reaffirmed guidance for FY16 distributions of 8.53cps, implying growth of 2%. Consistent with full-year guidance, and DB expectations, AusNet declared an interim distribution of 4.27cps. However, on our estimates, cash coverage ratios will remain stretched with the Electricity distribution business facing lower earnings from next year once the new regulatory period begins (lower regulatory WACC). We forecast FY17 distribution cash coverage of c.93%, which makes the company reliant on its DRP to help fund its FY17 distributions. I had the impression I was all alone with my warning back in June for Ausnet shareholders that the company might not be able to meet its dividend commitments, but financial institutions are becoming increasingly wary of the dividend coverage as well and are now openly wondering whether or not the dividend is sustainable, and the “reset” periods in the next 24 months will be important for Ausnet’s ability to generate cash flow. (click to enlarge) Source: Company presentation Investment thesis So there’s no reason why I would have to change the opinion I expressed in the article I wrote in June. Ausnet is paying a very handsome dividend with a current dividend yield in excess of 5%, but I fail to see how the company can afford this dividend. Right now, the current capital expenditures aren’t covering the dividend expenses, and the investment in growth capex will be offset by the expected lower revenues due to regulatory pressure. Ausnet still remains an “avoid” for investors, and even though shareholders might have been lured by the attractive dividend, I fail to see how this dividend could be maintained in the longer run (unless the company continues to have access to the debt markets, the regulatory situation improves or its shareholders continue to use the reinvestment plan). I understand people are attracted to high-dividend stocks, but I’m not comfortable with Ausnet’s dividend policy right now. And yes, that’s an (arbitrary) personal choice. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.