New Zealand Professional Investment Services Firm

Forsyth Barr

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.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Channel Infrastructure NZ Ltd / Equity Bottom-Up

<h2>Channel Infrastructure<br>Channelling its CHI</h2>
<div></div>
<p><strong>OUTPERFORM</strong></p>
<p>Inflation appears to be here&nbsp;higher and longer, with Channel Infrastructure (CHI) one of the biggest benefactors as more than 90% of its revenue is linked to the Producer Price Index (PPI). Both Treasury and the Reserve Bank (RBNZ) are forecasting inflation to remain above +3% for at least 18 months, leading to long-term earnings increases for CHI. We are now more confident that CHI will reinstate its dividend at the FY22 result in February 2023. We increase our target price +10cps (+8.9%) to NZ$1.22 and reiterate our OUTPERFORM rating. In an environment with an uncertain outlook, CHI is an attractive investment option positively leveraged to inflation, with limited downside risk.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/276/580/original/image_17356901921653529226800.png?1653529228" class="editor-image img-responsive" data-smartkarma-image-id="276580"></figure>
<div>
<h3>What's changed?&nbsp;</h3>
</div>
<div id="m_-5959933903220873305iwrmo3">
<ul>
<li><strong>Earnings</strong>:&nbsp;FY22/FY23/FY24 EBITDA -NZ$2m/NZ$0m/+NZ$3m to NZ$76m/NZ$83m/NZ$91m respectively</li>
<li><strong>Dividend</strong>:&nbsp;FY22/FY23/FY24 dividend +0.5cps/+2.0cps/+1.9cps to 4.0cps/9.0cps/9.3cps respectively</li>
<li><strong>Target price</strong>:&nbsp;Increased +10cps (+8.9%) to NZ$1.22</li>
</ul>
</div>
<div>
<h3>Inflation expected to remain elevated, boosting&nbsp;CHI's&nbsp;earnings outlook</h3>
</div>
<div id="m_-5959933903220873305ins15">
<p>In the past week Treasury and RBNZ have released their inflation expectations as part of the 2022 Budget and the May 2022 Monetary Policy Statement (MPS) respectively. Treasury expects Consumer Price Index (CPI) inflation to remain above 3.0% until March 2025 and RBNZ until December 2023. PPI inflation on average is +0.5% higher than CPI but is more volatile. It&nbsp;is currently&nbsp;running at 8.7% vs. CPI inflation of 6.9%. With more than 90% of&nbsp;CHI's&nbsp;revenue linked to PPI and an EBITDA margin of ~70%, CHI earnings are positively leveraged to inflation. The FY24 (and beyond) EBITDA increase is due to lifting the FY23/FY24 inflation assumption +98bp/+150bp.</p>
</div>
<div>
<h3>First time FY23 guidance reaffirms positive outlook</h3>
</div>
<div id="m_-5959933903220873305iku4m">
<p>CHI provided first time FY23 guidance as part of its bond issuance material, with EBITDA expected to be between NZ$76m and NZ$84m. Whilst our NZ$83m EBITDA forecast is towards the top of the range, we are being conservative assuming a +3.0% increase in the PPI for the six months to 30 September 2022 (which sets the FY23 PPI uplift).</p>
</div>
<div>
<h3>Reassessing dividend potential upwards, good debt headroom</h3>
</div>
<div id="m_-5959933903220873305io2k4">
<p>The FY23 guidance range and&nbsp;CHI's&nbsp;dividend policy indicates that CHI should be able to pay between 7.5cps and 12.0cps in FY23. To pay a dividend in early 2023&nbsp;CHI's&nbsp;net debt/EBITDA needs to be below 4.5x. Based on our revised forecasts, CHI has debt headroom of ~NZ$31m (~17%) or FY22 EBITDA headroom of ~NZ$5.6m (~7.5%). We are increasingly confident CHI will be able to restart its dividend at the FY22 result (4.0cps) and that it will be able to pay a higher dividend in FY23 (up +2.0cps to 9.0cps).</p>
</div>

Channel Infrastructure Channelling its CHI

OUTPERFORM
Inflation appears to be here&nbsp;higher and longer, with Channel Infrastructure (CHI) one of the biggest benefactors as more than 90% of its revenue is linked to the Producer Price Index (PPI). Both Treasury and the Reserve Bank (RBNZ) are forecasting inflation to remain above +3% for at least 18 months, leading to long-term earnings increases for CHI. We are now more confident that CHI will reinstate its dividend at the FY22 result in February 2023. We increase our target price +10cps (+8.9%) to NZ$1.22 and reiterate our OUTPERFORM rating. In an environment with an uncertain outlook, CHI is an attractive investment option positively leveraged to inflation, with limited downside risk.


What's changed?&nbsp;



Earnings:&nbsp;FY22/FY23/FY24 EBITDA -NZ$2m/NZ$0m/+NZ$3m to NZ$76m/NZ$83m/NZ$91m respectively
Dividend:&nbsp;FY22/FY23/FY24 dividend +0.5cps/+2.0cps/+1.9cps to 4.0cps/9.0cps/9.3cps respectively
Target price:&nbsp;Increased +10cps (+8.9%) to NZ$1.22



Inflation expected to remain elevated, boosting&nbsp;CHI's&nbsp;earnings outlook


In the past week Treasury and RBNZ have released their inflation expectations as part of the 2022 Budget and the May 2022 Monetary Policy Statement (MPS) respectively. Treasury expects Consumer Price Index (CPI) inflation to remain above 3.0% until March 2025 and RBNZ until December 2023. PPI inflation on average is +0.5% higher than CPI but is more volatile. It&nbsp;is currently&nbsp;running at 8.7% vs. CPI inflation of 6.9%. With more than 90% of&nbsp;CHI's&nbsp;revenue linked to PPI and an EBITDA margin of ~70%, CHI earnings are positively leveraged to inflation. The FY24 (and beyond) EBITDA increase is due to lifting the FY23/FY24 inflation assumption +98bp/+150bp.


First time FY23 guidance reaffirms positive outlook


CHI provided first time FY23 guidance as part of its bond issuance material, with EBITDA expected to be between NZ$76m and NZ$84m. Whilst our NZ$83m EBITDA forecast is towards the top of the range, we are being conservative assuming a +3.0% increase in the PPI for the six months to 30 September 2022 (which sets the FY23 PPI uplift).


Reassessing dividend potential upwards, good debt headroom


The FY23 guidance range and&nbsp;CHI's&nbsp;dividend policy indicates that CHI should be able to pay between 7.5cps and 12.0cps in FY23. To pay a dividend in early 2023&nbsp;CHI's&nbsp;net debt/EBITDA needs to be below 4.5x. Based on our revised forecasts, CHI has debt headroom of ~NZ$31m (~17%) or FY22 EBITDA headroom of ~NZ$5.6m (~7.5%). We are increasingly confident CHI will be able to restart its dividend at the FY22 result (4.0cps) and that it will be able to pay a higher dividend in FY23 (up +2.0cps to 9.0cps).


Channel Infrastructure: Channelling Its CHI