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Equity Bottom-Up

Channel Infrastructure NZ Ltd / Equity Bottom-Up

<h2>Channel Infrastructure NZ Ltd<br>Transition Set to Pay Dividends</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Channel Infrastructure (CHI) delivered an investor day that confirmed the transition from a refinery to an import and storage terminal is on schedule and tracking in line with cost guidance. CHI also reiterated FY23 guidance it provided in May 2022, with the top line appearing increasingly conservative in light of ongoing inflation and a clarified adjustment factor calculation. With more certainty on the revenue uplift driven by ongoing elevated inflation, we modestly lift FY23 revenue and dividend forecasts. In an uncertain market we continue to view CHI as an attractive place to hide given its stable earnings outlook and a sizeable FY23 dividend yield, offering downside support. We retain our OUTPERFORM rating and lift our target price +6cps (+5%) to NZ$1.28.</p>
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<h3>What's changed?</h3>
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<li><strong>Earnings</strong>:&nbsp;FY23/FY24&nbsp;EBITDAF lifted +NZ$2/+NZ$3m to NZ$86m/NZ$94m respectively</li>
<li><strong>Target price</strong>:&nbsp;Increased +6cps (+5%) to NZ$1.28</li>
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<h3>Lift in FY23 forecasts with more clarity&nbsp;on the PPI uplift to revenue</h3>
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<p>CHI continues to be a beneficiary of the heightened Producer Price Index (PPI) in 2022, with nine&nbsp;of the twelve&nbsp;months that will set the FY23 revenue uplift now behind us (though the PPI Index is only known for six of those). Its reiterated FY23 revenue forecast of NZ$116–120m appears&nbsp;conservative and we are comfortable with our revenue forecast being marginally ahead of the top end of this range at NZ$123m. The revenue uplift flows through to a +1cps (+10%) lift in our forecast FY23 dividend to 10cps. With revenue largely set, CHI management's focus is squarely on minimising and stabilising its cost base, with electricity (1/3 of that cost base)&nbsp;the immediate priority.</p>
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<h3>Growth opportunities in both the short and long term reiterated</h3>
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<p>There remains an abundant potential for growth at the Marsden site in both the short and long term. Capacity utilisation is at 30% for its tanks, 35% for the jetty and 65% for the pipeline. CHI estimates 50–70ML of additional diesel storage will be required by the NZ Government's likely new domestic stockholding policy, with CHI the most well placed candidate given its excess capacity. 60ML of additional storage would represent a ~+21% increase on its signed storage. CHI is also the logical candidate for any consolidation of existing terminal assets and for the storage of other products such as bitumen and marine fuels. Long term opportunities, namely sustainable aviation fuel and green hydrogen, remain at a very early stage but will ensure CHI's long-term future even as transport fuels decarbonise.&nbsp;</p>
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Channel Infrastructure NZ Ltd Transition Set to Pay Dividends

OUTPERFORM
Channel Infrastructure (CHI) delivered an investor day that confirmed the transition from a refinery to an import and storage terminal is on schedule and tracking in line with cost guidance. CHI also reiterated FY23 guidance it provided in May 2022, with the top line appearing increasingly conservative in light of ongoing inflation and a clarified adjustment factor calculation. With more certainty on the revenue uplift driven by ongoing elevated inflation, we modestly lift FY23 revenue and dividend forecasts. In an uncertain market we continue to view CHI as an attractive place to hide given its stable earnings outlook and a sizeable FY23 dividend yield, offering downside support. We retain our OUTPERFORM rating and lift our target price +6cps (+5%) to NZ$1.28.


What's changed?



Earnings:&nbsp;FY23/FY24&nbsp;EBITDAF lifted +NZ$2/+NZ$3m to NZ$86m/NZ$94m respectively
Target price:&nbsp;Increased +6cps (+5%) to NZ$1.28



Lift in FY23 forecasts with more clarity&nbsp;on the PPI uplift to revenue


CHI continues to be a beneficiary of the heightened Producer Price Index (PPI) in 2022, with nine&nbsp;of the twelve&nbsp;months that will set the FY23 revenue uplift now behind us (though the PPI Index is only known for six of those). Its reiterated FY23 revenue forecast of NZ$116–120m appears&nbsp;conservative and we are comfortable with our revenue forecast being marginally ahead of the top end of this range at NZ$123m. The revenue uplift flows through to a +1cps (+10%) lift in our forecast FY23 dividend to 10cps. With revenue largely set, CHI management's focus is squarely on minimising and stabilising its cost base, with electricity (1/3 of that cost base)&nbsp;the immediate priority.


Growth opportunities in both the short and long term reiterated


There remains an abundant potential for growth at the Marsden site in both the short and long term. Capacity utilisation is at 30% for its tanks, 35% for the jetty and 65% for the pipeline. CHI estimates 50–70ML of additional diesel storage will be required by the NZ Government's likely new domestic stockholding policy, with CHI the most well placed candidate given its excess capacity. 60ML of additional storage would represent a ~+21% increase on its signed storage. CHI is also the logical candidate for any consolidation of existing terminal assets and for the storage of other products such as bitumen and marine fuels. Long term opportunities, namely sustainable aviation fuel and green hydrogen, remain at a very early stage but will ensure CHI's long-term future even as transport fuels decarbonise.&nbsp;


Channel Infrastructure NZ Ltd: Transition Set to Pay Dividends