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<br>Great Exit, Now for the Hard Part</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Tilt Renewables (TLT) have announced they have entered a Scheme Implementation Agreement (SIA) with Powering Australian Renewables (PowAR) and Mercury (MCY). Under the SIA TLT's shareholders will receive NZ$7.80 per share resulting in cash proceeds of ~NZ$1.9b for Infratil's (IFT) 65% stake in TLT and is set to trigger a total incentive fee of just over NZ$200m. TLT was spun out of Trustpower (TPW) in October 2016, a core component of IFT's portfolio since inception in 1994. However, looking at IFT's returns since TLT was listed, the sale price implies an unlevered IRR of ~40% before fees and ~35% after fees. This is a very strong exit even in light of interest rate tail winds. The next question is — where to from here? We would expect the lion's share of the net NZ$1.9b proceeds to be re-deployed into new assets. However, we would not rule out some form of capital distribution.&nbsp;&nbsp;</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Target price</strong>:&nbsp;Increased to NZ$8.20 (from NZ$7.85) reflecting increased TLT sale proceeds</li>
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<h3>What a difference three months makes; Australian Super bid likely firmly off&nbsp;the table but conglomerate discount will not return</h3>
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<p>The Australian Super Fund has gone quiet since its rejected bid of IFT three months ago. We believe that TLT and Canberra Data Centres (CDC) were the two main assets of interest to Australian Super, with one of them now likely gone we believe a new bid is off the table. However, we do believe that the bid has contributed to a "permanent" removal of IFT's historic double discount. In our report "Reverting to a New Normal" published 17th February 2021 we removed&nbsp; the 10% conglomerate discount that IFT has historically traded on. The disciplined TLT exit solidifies our view that the market is unlikely to return to applying a conglomerate discount for the foreseeable future.&nbsp;</p>
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<h3>Buying well is harder than selling well in today's markets</h3>
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<p>With public market valuations at or close to all time highs and private valuations even higher, we would describe the market as a "sellers" market. IFT has done an excellent job of achieving a high price for TLT, but now finds itself in a more challenging situation; re-deploying the proceeds. We see ample room to re-deploy a meaningful proportion of the proceeds into current portfolio companies as well as expanding on existing platforms. However, at its February investor day IFT also outlined an ambition to branch out of its traditional strong hold of scalable infrastructure into areas such as Artificial Intelligence and Robotics. Major acquisitions in new areas comes with increased risk and we believe that it will be difficult to find attractively priced targets in these areas.&nbsp;&nbsp;</p>
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<h3>Near term NZ$300m in fees; medium term should moderate&nbsp;</h3>
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<p>The sale of TLT will bring about heightened near-term fees with FY21 to be based on a "undisturbed" TLT share price of NZ$5.44 resulting in a combined fee of NZ$217m. In addition, a realised fee upon completion of the sale is estimated at NZ$107m (payable April 2022). Medium term we would expect the fee to moderate as IFT's total capital lowers.</p>
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<div><strong>Aaron Ibbotson CFA</strong></div>
<div><a href="mailto:aaron.ibbotson@forsythbarr.co.nz" target="_blank" rel="noopener">aaron.ibbotson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 9 368 0024</div>
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<div><strong>Matt Montgomerie</strong></div>
<div><a href="mailto:matt.montgomerie@forsythbarr.co.nz" target="_blank" rel="noopener">matt.montgomerie@forsythbarr.<wbr>co.nz</a></div>
<div>+64 9 368 0124</div>
</div>
</div>

Infratil Great Exit, Now for the Hard Part

NEUTRAL
Tilt Renewables (TLT) have announced they have entered a Scheme Implementation Agreement (SIA) with Powering Australian Renewables (PowAR) and Mercury (MCY). Under the SIA TLT's shareholders will receive NZ$7.80 per share resulting in cash proceeds of ~NZ$1.9b for Infratil's (IFT) 65% stake in TLT and is set to trigger a total incentive fee of just over NZ$200m. TLT was spun out of Trustpower (TPW) in October 2016, a core component of IFT's portfolio since inception in 1994. However, looking at IFT's returns since TLT was listed, the sale price implies an unlevered IRR of ~40% before fees and ~35% after fees. This is a very strong exit even in light of interest rate tail winds. The next question is — where to from here? We would expect the lion's share of the net NZ$1.9b proceeds to be re-deployed into new assets. However, we would not rule out some form of capital distribution.&nbsp;&nbsp;


What's changed?&nbsp;



Target price:&nbsp;Increased to NZ$8.20 (from NZ$7.85) reflecting increased TLT sale proceeds



What a difference three months makes; Australian Super bid likely firmly off&nbsp;the table but conglomerate discount will not return


The Australian Super Fund has gone quiet since its rejected bid of IFT three months ago. We believe that TLT and Canberra Data Centres (CDC) were the two main assets of interest to Australian Super, with one of them now likely gone we believe a new bid is off the table. However, we do believe that the bid has contributed to a "permanent" removal of IFT's historic double discount. In our report "Reverting to a New Normal" published 17th February 2021 we removed&nbsp; the 10% conglomerate discount that IFT has historically traded on. The disciplined TLT exit solidifies our view that the market is unlikely to return to applying a conglomerate discount for the foreseeable future.&nbsp;


Buying well is harder than selling well in today's markets


With public market valuations at or close to all time highs and private valuations even higher, we would describe the market as a "sellers" market. IFT has done an excellent job of achieving a high price for TLT, but now finds itself in a more challenging situation; re-deploying the proceeds. We see ample room to re-deploy a meaningful proportion of the proceeds into current portfolio companies as well as expanding on existing platforms. However, at its February investor day IFT also outlined an ambition to branch out of its traditional strong hold of scalable infrastructure into areas such as Artificial Intelligence and Robotics. Major acquisitions in new areas comes with increased risk and we believe that it will be difficult to find attractively priced targets in these areas.&nbsp;&nbsp;


Near term NZ$300m in fees; medium term should moderate&nbsp;


The sale of TLT will bring about heightened near-term fees with FY21 to be based on a "undisturbed" TLT share price of NZ$5.44 resulting in a combined fee of NZ$217m. In addition, a realised fee upon completion of the sale is estimated at NZ$107m (payable April 2022). Medium term we would expect the fee to moderate as IFT's total capital lowers.



Aaron Ibbotson CFA
aaron.ibbotson@forsythbarr.co.nz
+64 9 368 0024





Matt Montgomerie
matt.montgomerie@forsythbarr.co.nz
+64 9 368 0124



Infratil: Great Exit, Now for the Hard Part

Infratil Ltd

Infratil: Great Exit, Now for the Hard Part