Duet (DUE) capital raising provides a compelling low risk opportunity

Duet (DUE) owns regulated gas and electricity utilities . The company has recently undertaken a major capital raising of $1.7 billion (DUE market capitalisation $2.9 billion) to purchase Energy Developments (ENE). ENE is involved in remote energy, waste coal mine gas and landfill gas. Whilst there is natural scepticism around the deal and it marginally raises the risk profile of DUE - we judge that the recent lacklustre performance of DUE ahead of the raising, and the subsequent under performance post the capital raising, has provided an opportunity. DUE is now delivering a market leading distribution yield of 8.3%. This yield is one of the highest in the Australian market and compares favourably with the 10 year Australian government bond rate of 2.85% and the Australian cash rate of 2%. Importantly, post acquisition DUE is likely to generate 2.5% distribution growth over the medium term. We think that the current large scale raising and natural concerns around a deal of this size has provided an excellent opportunity to purchase a relatively low risk cash flow stream at a good price.