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

<h2>Infratil</h2>
Defensive Portfolio Working Under Stress
OUTPERFORM
We expect Infratil's (IFT) portfolio to perform well during the COVID-19 crisis with only Wellington Airport (WIAL) having any direct earnings exposure. In addition, the remainder of the portfolio is also well protected from the upcoming economic downturn. Whilst IFT has high gearing, IFT has spare debt capacity to absorb WIAL's difficulties, plus a substantial (we estimate ~$170m) coming back from Tilt Renewables (TLT) in the near future. In addition, IFT's continued buyback is a strong signal the current travails are temporary. Nevertheless, WIAL's short-term challenges and the material fall in aged care/retirement village sentiment has been the driver to lower our IFT net asset value -38cps (-6%) to $5.64 and our target price down -30cps to $4.90. We reiterate our OUTPERFORM rating.
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col span="2"> <col span="2"> <col> <col></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">IFT</td>
<td style="width: 48pt;">Financials:Mar/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$4.00</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 43.2pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$4.90</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 43.2pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">Medium</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 43.2pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">658.7m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">17.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">17.3&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">17.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">18.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$2,635m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">51</td>
<td style="text-align: left; width: 42.6pt;">65</td>
<td style="text-align: left; width: 43.2pt;">80</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">4.3</td>
<td style="text-align: left; width: 42.6pt;">4.3</td>
<td style="text-align: left; width: 48pt;">4.3</td>
<td style="text-align: left; width: 42.6pt;">4.5&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">637.5k (NZ$3,008k)</td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">5.2</td>
<td style="text-align: left; width: 42.6pt;">5.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.7&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">6.3&nbsp;</td>
</tr>
</tbody>
</table>
IFT&nbsp;portfolio largely&nbsp;protected from&nbsp;COVID-19, but&nbsp;WIAL&nbsp;under some stress
Of all of IFT's assets, the only asset that faces direct exposure to COVID-19 is WIAL. International flights have effectively ceased and Air New Zealand (AIR) has cut domestic capacity -30%, with more possible as the country bunkers down. We expect WIAL will breach its earnings covenants that cover its bank facilities, however, we also expect local banks to look through the current temporary turmoil. In addition, we believe that IFT has sufficient debt capacity to support WIAL if required.
WIAL is ~11% IFT's portfolio (based on our revised NAV assessment), so not a material portion. The rest of the portfolio has strong defensive characteristics that we expect will help IFT OUTPERFORM as the forthcoming economic downturn unfolds.
Debt position is high (as always), but&nbsp;IFT&nbsp;has spare capacity and confidence in its current position
IFT's current net debt balance is ~$1.8b. IFT still has ~$400m of spare debt capacity (which is there for times like this) and an additional ~$170m likely to come from TLT in the near future. A strong signal that IFT is comfortable with its balance sheet is the buyback it started on 9 March, with buyback volumes increasing in recent days as IFT's share price has fallen further. Nevertheless, we have flattened our dividend forecast for the next two years to 17.25cps (down-0.25cps/-1.00cps/-1.00cps in FY20/FY21/FY22 respectively).
TLT&nbsp;cash getting closer
In December 2019, TLT received net proceeds of ~A$455m (~NZ$1.00/TLT share) from the sale of Snowtown II. We expect a large proportion of those proceeds to be returned to shareholders. Our base assumption is the ascribed capital of A$260m (~NZ$0.57cps) (i.e. the 2019 capital raise) will be returned and that this will be a catalyst for TLT (and IFT) re-rating upwards. IFT's share of the expected capital to be returned is ~NZ$170m (~NZ$0.26/IFT share). A capital return of A$260m should leave sufficient capital in TLT for it to continue with its near-term wind developments. A logical announcement time is TLT's FY20 result date in early May, although it could be earlier.
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185

Infratil
Defensive Portfolio Working Under Stress
OUTPERFORM
We expect Infratil's (IFT) portfolio to perform well during the COVID-19 crisis with only Wellington Airport (WIAL) having any direct earnings exposure. In addition, the remainder of the portfolio is also well protected from the upcoming economic downturn. Whilst IFT has high gearing, IFT has spare debt capacity to absorb WIAL's difficulties, plus a substantial (we estimate ~$170m) coming back from Tilt Renewables (TLT) in the near future. In addition, IFT's continued buyback is a strong signal the current travails are temporary. Nevertheless, WIAL's short-term challenges and the material fall in aged care/retirement village sentiment has been the driver to lower our IFT net asset value -38cps (-6%) to $5.64 and our target price down -30cps to $4.90. We reiterate our OUTPERFORM rating.
         


NZX Code
IFT
Financials:Mar/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$4.00
NPAT* (NZ$m)
n/a
n/a
n/a
n/a
EV/EBITDA
n/a
n/a
n/a
n/a


Target price
NZ$4.90
EPS* (NZc)
n/a
n/a
n/a
n/a
EV/EBIT
n/a
n/a
n/a
n/a


Risk rating
Medium
EPS growth* (%)
n/a
n/a
n/a
n/a
PE
n/a
n/a
n/a
n/a


Issued shares
658.7m
DPS (NZc)
17.3&nbsp;
17.3&nbsp;
17.3&nbsp;
18.0&nbsp;
Price/NTA
n/a
n/a
n/a
n/a


Market cap
NZ$2,635m
Imputation (%)
51
65
80
100
Cash div yld (%)
4.3
4.3
4.3
4.5&nbsp;


Avg daily turnover
637.5k (NZ$3,008k)
*Based on normalised profits


Gross div yld (%)
5.2
5.4&nbsp;
5.7&nbsp;
6.3&nbsp;



IFT&nbsp;portfolio largely&nbsp;protected from&nbsp;COVID-19, but&nbsp;WIAL&nbsp;under some stress
Of all of IFT's assets, the only asset that faces direct exposure to COVID-19 is WIAL. International flights have effectively ceased and Air New Zealand (AIR) has cut domestic capacity -30%, with more possible as the country bunkers down. We expect WIAL will breach its earnings covenants that cover its bank facilities, however, we also expect local banks to look through the current temporary turmoil. In addition, we believe that IFT has sufficient debt capacity to support WIAL if required.
WIAL is ~11% IFT's portfolio (based on our revised NAV assessment), so not a material portion. The rest of the portfolio has strong defensive characteristics that we expect will help IFT OUTPERFORM as the forthcoming economic downturn unfolds.
Debt position is high (as always), but&nbsp;IFT&nbsp;has spare capacity and confidence in its current position
IFT's current net debt balance is ~$1.8b. IFT still has ~$400m of spare debt capacity (which is there for times like this) and an additional ~$170m likely to come from TLT in the near future. A strong signal that IFT is comfortable with its balance sheet is the buyback it started on 9 March, with buyback volumes increasing in recent days as IFT's share price has fallen further. Nevertheless, we have flattened our dividend forecast for the next two years to 17.25cps (down-0.25cps/-1.00cps/-1.00cps in FY20/FY21/FY22 respectively).
TLT&nbsp;cash getting closer
In December 2019, TLT received net proceeds of ~A$455m (~NZ$1.00/TLT share) from the sale of Snowtown II. We expect a large proportion of those proceeds to be returned to shareholders. Our base assumption is the ascribed capital of A$260m (~NZ$0.57cps) (i.e. the 2019 capital raise) will be returned and that this will be a catalyst for TLT (and IFT) re-rating upwards. IFT's share of the expected capital to be returned is ~NZ$170m (~NZ$0.26/IFT share). A capital return of A$260m should leave sufficient capital in TLT for it to continue with its near-term wind developments. A logical announcement time is TLT's FY20 result date in early May, although it could be earlier.
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185

Infratil: Defensive Portfolio Working Under Stress

Infratil Ltd

Infratil: Defensive Portfolio Working Under Stress