New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

Equity Bottom-Up

<h2>Infratil</h2>
Talked the Talk, Now to Walk the Walk
Infratil’s (IFT) investor day showcased its high growth business, CDC and its most recent acquisition, Vodafone. The CDC story is now familiar and it again highlighted the undoubted potential in the business. Vodafone is more of a turnaround story, and whilst there is clearly upside opportunity the 30%+ EBITDA margin target will require excellent execution as well as no material negative surprises. Our net asset value assessment ($5.58), target price ($4.83) and rating (OUTPERFORM) are unchanged.
Canberra Data Centres (CDC) continues to grow — quickly
CDC provided a story similar to IFT’s April investor day (and earlier investor days). The growth opportunity remains in front of CDC. The data centre market is still growing quickly with no indication of price pressure or a material slowing of growth.
From an earnings perspective CDC provided a small guidance increase, adding +A$10m to its FY20 EBITDA range, so the range is now A$110m to A$120m (our forecast is A$110m). Run rate EBITDA as at 31 March 2020, also added +$10m to the top of the range to A$135m to A$145m. Whilst there is no formal FY21 guidance, indications are FY21 EBITDA growth will be at least +20% and could be as high as +50% if sign-up rates are strong. We currently forecast FY21 EBITDA run rate growth of +30%, as the under construction Sydney data centre fills up.
Vodafone’s (VOD) work is just beginning
VOD provided an aspiration to grow its EBITDA margin from the current &lt;23% to “low-30s%”, which implies EBITDA growth of ~+$200m.&nbsp;IF&nbsp;VOD can achieve that, IFT’s valuation upside is substantial (at least +$400m NAV, ~+60cps — we assume ~26% margins in four years). Areas where VOD expects to generate earnings growth are: cost out (VOD is aiming to reduce costs -20%, its main source of near-term growth); moving to a single IT platform (currently VOD uses four legacy platforms from various acquisitions); 5G leadership (VOD will be first to market in December); fixed wireless opportunity reducing input costs (VOD is looking to grow from ~10% to between 20% and 30%); and nominal revenue improvement (this also depends on the market).
Execution is key. Whilst there are obvious improvements that can be made (e.g. single IT platform, improving customer service), it will not be easy. Monetising 5G investment is not a given and will require market discipline. In addition, we note that VOD ARPU’s are above those of Spark, a premium which will have to be retained.&nbsp;
<div class="content-highlight">
Investment View
Our rating is OUTPERFORM. IFT has a solid core of investments that will perform well in a low interest rate environment. Near-term valuation upside comes from CDC growth and Vodafone operational improvements with other core portfolio investments providing good downside protection.&nbsp;
</div>
<a target="_blank">Andrew Harvey-Green</a>
<a target="_blank">andrew.harvey-green@forsythbarr.co.nz</a>
<a target="_blank">+64 4 495 8185</a>

Infratil
Talked the Talk, Now to Walk the Walk
Infratil’s (IFT) investor day showcased its high growth business, CDC and its most recent acquisition, Vodafone. The CDC story is now familiar and it again highlighted the undoubted potential in the business. Vodafone is more of a turnaround story, and whilst there is clearly upside opportunity the 30%+ EBITDA margin target will require excellent execution as well as no material negative surprises. Our net asset value assessment ($5.58), target price ($4.83) and rating (OUTPERFORM) are unchanged.
Canberra Data Centres (CDC) continues to grow — quickly
CDC provided a story similar to IFT’s April investor day (and earlier investor days). The growth opportunity remains in front of CDC. The data centre market is still growing quickly with no indication of price pressure or a material slowing of growth.
From an earnings perspective CDC provided a small guidance increase, adding +A$10m to its FY20 EBITDA range, so the range is now A$110m to A$120m (our forecast is A$110m). Run rate EBITDA as at 31 March 2020, also added +$10m to the top of the range to A$135m to A$145m. Whilst there is no formal FY21 guidance, indications are FY21 EBITDA growth will be at least +20% and could be as high as +50% if sign-up rates are strong. We currently forecast FY21 EBITDA run rate growth of +30%, as the under construction Sydney data centre fills up.
Vodafone’s (VOD) work is just beginning
VOD provided an aspiration to grow its EBITDA margin from the current &lt;23% to “low-30s%”, which implies EBITDA growth of ~+$200m.&nbsp;IF&nbsp;VOD can achieve that, IFT’s valuation upside is substantial (at least +$400m NAV, ~+60cps — we assume ~26% margins in four years). Areas where VOD expects to generate earnings growth are: cost out (VOD is aiming to reduce costs -20%, its main source of near-term growth); moving to a single IT platform (currently VOD uses four legacy platforms from various acquisitions); 5G leadership (VOD will be first to market in December); fixed wireless opportunity reducing input costs (VOD is looking to grow from ~10% to between 20% and 30%); and nominal revenue improvement (this also depends on the market).
Execution is key. Whilst there are obvious improvements that can be made (e.g. single IT platform, improving customer service), it will not be easy. Monetising 5G investment is not a given and will require market discipline. In addition, we note that VOD ARPU’s are above those of Spark, a premium which will have to be retained.&nbsp;

Investment View
Our rating is OUTPERFORM. IFT has a solid core of investments that will perform well in a low interest rate environment. Near-term valuation upside comes from CDC growth and Vodafone operational improvements with other core portfolio investments providing good downside protection.&nbsp;

Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185

Infratil: Talked the Talk, Now to Walk the Walk

<h2>Infratil</h2>
Infrastructure Interest Rising
Falling interest rates are benefiting Infratil’s (IFT) infrastructure investments with comparator assets to IFT’s investments all performing strongly in the market. Applying some (but not all) of the revised valuation metrics indicates IFT is once again offering good value. In addition, we expect positive near-term news flow from IFT’s October investor day and we are more positive on Trustpower (TPW) and Tilt Renewables (TLT). We have lifted our net asset value (NAV) assessment +0.66cps to $5.56 and our target price +62cps to $4.83. We upgrade our rating to OUTPERFORM from NEUTRAL.
What’s changed?
<ul>
<li>Net asset value: Increased +$0.66 (+14%) to $5.56</li>
<li>Target Price: Lifted +62cps (+15%) to $4.83</li>
<li>Rating:&nbsp;Raised to OUTPERFORM from NEUTRAL</li>
</ul>
Low interest rate environment benefits IFT investment portfolio
IFT’s asset portfolio, being infrastructure based, has benefitted from the falling interest rate environment. We have been reassessing our asset valuations in light of our lower risk free rate assumption. Changes to our Trustpower (TPW) and Tilt Renewables (TLT) valuation lift IFT’s NAV +0.31cps (+19%) and +0.21cps (+20%) respectively.
Wellington Airport landing charges have a degree of downside protection
Regulated assets do not have the same upside to low interest rates, because interest rates are a core driver of the regulatory rate of return and therefore company earnings. However, we understand that WIAL has some downside protection in that the landing charges for the next regulatory period will be based on the interest rates prevailing at the time of the start of the regulatory period, 1 April 2019; hence, the fall in WACC is less than it could otherwise have been. Significant capex plans means we do not expect a fall in landing charges for the forthcoming period. We have lifted our WIAL NAV +17cps (+14%) to $900m which equates to a ~-30% discount to Auckland Airport (AIA).
Vodafone announces 5G and higher opex
In the past six weeks Vodafone has announced it is rolling out a 5G network and that it is spending an extra $10m (mainly on staff) to address customer service issues. Vodafone has beaten Spark (SPK) to the punch on 5G, although the launch planned later in 2019 is only to parts of Auckland, Wellington, Christchurch and Queenstown. It is too early to say what kind of impact this will have on Vodafone. Vodafone’s closest comparator, SPK, has had a strong run with its market cap, rising +19% since the Vodafone acquisition. However, much of the increase has come following SPK’s FY19 result and the reaffirmation of its dividend. We have lifted our Vodafone NAV a more modest +7% (+11cps).
CDC uplift with NextDC (NXT) multiples continuing to lift
We have increased our CDC NAV +24cps (+16%) to $1.71. CDC benefits from falling interest rates boosting our DCF estimate and NXT multiples continuing to rise — it is trading on a 1-year forward EBITDA multiple of 25x.
<div class="content-highlight">
Investment View
Our rating is OUTPERFORM. IFT has a solid core of investments that will perform well in a low interest rate environment. Near-term operational upside comes from CDC and Vodafone with other core portfolio investments providing good downside protection.
</div>
Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185

Infratil
Infrastructure Interest Rising
Falling interest rates are benefiting Infratil’s (IFT) infrastructure investments with comparator assets to IFT’s investments all performing strongly in the market. Applying some (but not all) of the revised valuation metrics indicates IFT is once again offering good value. In addition, we expect positive near-term news flow from IFT’s October investor day and we are more positive on Trustpower (TPW) and Tilt Renewables (TLT). We have lifted our net asset value (NAV) assessment +0.66cps to $5.56 and our target price +62cps to $4.83. We upgrade our rating to OUTPERFORM from NEUTRAL.
What’s changed?

Net asset value: Increased +$0.66 (+14%) to $5.56
Target Price: Lifted +62cps (+15%) to $4.83
Rating:&nbsp;Raised to OUTPERFORM from NEUTRAL

Low interest rate environment benefits IFT investment portfolio
IFT’s asset portfolio, being infrastructure based, has benefitted from the falling interest rate environment. We have been reassessing our asset valuations in light of our lower risk free rate assumption. Changes to our Trustpower (TPW) and Tilt Renewables (TLT) valuation lift IFT’s NAV +0.31cps (+19%) and +0.21cps (+20%) respectively.
Wellington Airport landing charges have a degree of downside protection
Regulated assets do not have the same upside to low interest rates, because interest rates are a core driver of the regulatory rate of return and therefore company earnings. However, we understand that WIAL has some downside protection in that the landing charges for the next regulatory period will be based on the interest rates prevailing at the time of the start of the regulatory period, 1 April 2019; hence, the fall in WACC is less than it could otherwise have been. Significant capex plans means we do not expect a fall in landing charges for the forthcoming period. We have lifted our WIAL NAV +17cps (+14%) to $900m which equates to a ~-30% discount to Auckland Airport (AIA).
Vodafone announces 5G and higher opex
In the past six weeks Vodafone has announced it is rolling out a 5G network and that it is spending an extra $10m (mainly on staff) to address customer service issues. Vodafone has beaten Spark (SPK) to the punch on 5G, although the launch planned later in 2019 is only to parts of Auckland, Wellington, Christchurch and Queenstown. It is too early to say what kind of impact this will have on Vodafone. Vodafone’s closest comparator, SPK, has had a strong run with its market cap, rising +19% since the Vodafone acquisition. However, much of the increase has come following SPK’s FY19 result and the reaffirmation of its dividend. We have lifted our Vodafone NAV a more modest +7% (+11cps).
CDC uplift with NextDC (NXT) multiples continuing to lift
We have increased our CDC NAV +24cps (+16%) to $1.71. CDC benefits from falling interest rates boosting our DCF estimate and NXT multiples continuing to rise — it is trading on a 1-year forward EBITDA multiple of 25x.

Investment View
Our rating is OUTPERFORM. IFT has a solid core of investments that will perform well in a low interest rate environment. Near-term operational upside comes from CDC and Vodafone with other core portfolio investments providing good downside protection.

Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185

New Zealand

Infratil Limited is an infrastructure investment company. The Company invests in airports, energy such as renewable and waste-energy, and public transportation.

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Infratil Ltd (IFT NZ)

Infratil: Talked the Talk, Now to Walk the Walk

Infratil Talked the Talk, Now to Walk the Walk Infratil’s (IFT) investor day showcased its high growth business, CDC and its most recent...

Forsyth Barr

Infratil: Infrastructure Interest Rising

Infratil Infrastructure Interest Rising Falling interest rates are benefiting Infratil’s (IFT) infrastructure investments with comparator assets to...

Forsyth Barr

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Market Cap (USDm)

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