Will Spark's 'next board' be better at unleashing the true value of its assets?

It might be trading at an all-time high of $2.31 and a 62% premium to its intrinsic value, but due to alleged failings of its board, concerns around acquisitions and the issue of undervalued equity, there's a lot uncertainty over how much Spark Infrastructure Group (ASX: SKI) is really worth ahead of any future takeover.

What's allegedly missing from Spark's valuation, according to shareholder agitator and would-be director James Dunphy is the unregulated businesses in the $3.8 billion utility's operating companies which makes it vulnerable to being taken over 40% below its true market value.

Dunphy clearly wants the board line up replaced and shareholders seem to be sharing similar sentiment having used the recent AGM to serve a "first strike" on the board over the remuneration report in evidence of broader levels of dissatisfaction.

Given that Spark has been highly exposed to takeover risk from the large number of infrastructure asset buyers on the hunt in for something cheap in Australia, the board does seem to lack a director on it with experience in hostile transactions, and this is one of the issues that concerns Dunphy the most.

Unsurprisingly, Dunphy's recent nomination as a director was not endorsed by the board. However, the significant support he received from institutional investors, suggests much deeper levels of dissatisfaction with how the company is being run.

With the board unable to get the true value of the business reflected in the share price, Dunphy is trying to mount shareholder pressure for it to consider a full menu of value-unlocking transactions, including an asset sale.

Since the AGM, the board has attempted to appease shareholder concerns by selling most of its 10.6% holding in rival DUET Group (ASX: DUE).

Given that Spark has a funding gap of $2.4 billion and an increasing net-debt to equity, any attempts to accelerate debt repayment – by taking advantage of the strength in the DUET price following a positive regulatory decision – are encouraging.

Funds raised from the $305 million sale of its interests in DUET allow the repayment of debt taken out to help cover its part ownership in the TransGrid investment to be accelerated.

However, it's understood that Spark will have to come up with another $928 million to get its net debt-to-regulated asset base ratio down to 75% which was the target laid out at Spark's annual general meeting in May. 

Given the difficulty Spark will have increasing payments to shareholders in coming years while also paying down $205 million of debt it took on to buy the 15% TransGrid stake, institutional and retail shareholders alike clearly aren't convinced the acquisition was a great idea.

In addition to TransGrid, Spark's exposure to regulated electricity businesses includes a 49% stake in Victoria Power Networks, and a 49% in SA Power Networks.

The stability of its revenues and the regulated nature of Spark's assets allow for dependable distributions over a long time, and this is the basis of its positive distribution outlook for the next three years.

Stable and defensive earnings will continue to support Spark's dividends, with dividend per share (DPS) expected to grow from $0.13 in 2016 to $0.14 by 2018.

Management has also reaffirmed expected guidance for 2017 and 2018.

Having already declared that it won't be participating in the Ausgrid sales process, Spark will be left to focus on its current assets, the regulatory reset reviews and relevant appeals.

From July 1, there should be improvement in the SA Power Networks contributions with further flow-on to year-by-year improvements for the next five years of the regulatory period.

Fortunately, there are no expectations of capital injections for SA Power Networks and Victoria Power Networks following the regulatory periods. Equally encouraging, Spark has more potential to grow with the privatisation of other state grids and to develop unregulated revenue streams.

It also has further upside on the dividend front – yield 5.82% in 2016 – with the company to conduct a review in 2015-16 after Victoria Power Networks comes out of its regulatory rest period.

Spark is trading on a 2016 price earnings ratio (P/E) of 23.84 times, compared with an industry average of 21.4 times, and is moving progressively closer to its high range 12-month target price of $2.64.

Admittedly the stock isn't cheap, but given the defensive nature of its operations, it remains one of the better infrastructures plays in this space.

The company is forecast to deliver good earnings per share (EPS) growth from $0.09 in 2016 to $0.10 by 2018; and return on equity (ROE) is expected to jump from 7.59% in 2016 to 8.85% by 2018.

Adding to future upside is the likelihood of a new board line-up, while any future review of its unregulated businesses could bode well for future asset sales or takeover bids.