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>
<p><strong>Stretching Data Centre Growth — FY20 Result</strong></p>
<p><strong>NEUTRAL</strong></p>
<p>Whilst Infratil's (IFT) FY20 result had two minor positive surprises, recent strong share price performance and a weaker than expected CDC Data Centre (CDC) outlook has resulted in us pulling back our rating to NEUTRAL from OUTPERFORM. The positive surprises in the result were Vodafone's FY20 EBITDA being closer to the top of its guidance range than the bottom, and the decision to maintain the 2H20 dividend at 11cps. However, CDC FY21 guidance was lower than expected, recent share price performance and an -NZ12cps pull back of our net asset value assessment (NAV) to NZ$5.52 has resulted in the discount to NAV falling to -13.2%. We have trimmed our target price -NZ10cps to NZ$4.80.</p>
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<p><strong>CDC&nbsp;delivers expected growth, but we're struggling with the value</strong></p>
<div id="m_4318814693379283775i6gat">
<p>CDC delivered the expected FY20 EBITDA growth (up +63% on FY19 to A$117.5m), but the FY21 EBITDA guidance of A$145m to A$155m was lower than expected. The main issue appears to be a decline in EBITDA/MW used, which we estimate has fallen -13% in the past six-months, far more than expected. However, data centres are market darlings at present, with CDC's closest comparator, NextDC, trading on a 38x FY20 EBITDA multiple. Notwithstanding the strong growth in the data centre market, our DCF struggles to justify that lofty valuation metric, such that our CDC DCF valuation is -31% than the implied EV/EBITDA based valuation.</p>
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<p><strong>Dividend decision a minor surprise, shows&nbsp;IFT's&nbsp;confidence in outlook — but is it sustainable?</strong></p>
<div id="m_4318814693379283775i5l6t">
<p>In its early April 2020 market update IFT indicated it was likely to trim the 2H20 dividend. In the end it decided to maintain the NZ11cps final dividend — a strong signal the IFT is confident its businesses will manage the COVID-19 economic downturn well. Whilst we assume that IFT will maintain the current full year NZ17.25cps dividend in the coming years, free cash flows from IFT's investments will not be sufficient to cover the dividend in the next three years. This is not an unusual situation for IFT and the Tilt Renewables (TLT) A$170m capital return will fund dividend payments in FY21 and most of FY22. However, long-term dividend sustainability relies on CDC and Vodafone earnings growth and Wellington Airport (WIAL) subvention payments returning to pre COVID-19 levels by FY24. At present the next dividend change is weighted to the downside.</p>
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<p><strong>Discount to&nbsp;NAV&nbsp;closes up in recent weeks, rating pulled back to NEUTRAL</strong></p>
<div id="m_4318814693379283775i1hp6">
<p>We have lowered our IFT NAV -NZ12cps to NZ$5.52 with modest changes to several businesses (none of them material in their own right). The decline in our NAV assessment has led to the -NZ10cps fall in our target price to NZ$4.80. Over recent weeks IFT has been a strong share price performer, which has seen the discount to NAV close up from a low of ~-39% in late March 2020, to -13.2% now. That compares to a long-term average discount to NAV of ~-20% and the last five years average of -18%. The lower than average discount to NAV, flat at best near-term dividend profile, and slower expected NAV growth in the coming months are the main factors behind our decision to lower our rating to NEUTRAL from OUTPERFORM.</p>
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<div><strong>Andrew Harvey-Green</strong></div>
<div><a href="mailto:andrew.harvey-green@forsythbarr.co.nz" target="_blank" rel="noopener">andrew.harvey-green@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 8185</div>
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Infratil
Stretching Data Centre Growth — FY20 Result
NEUTRAL
Whilst Infratil's (IFT) FY20 result had two minor positive surprises, recent strong share price performance and a weaker than expected CDC Data Centre (CDC) outlook has resulted in us pulling back our rating to NEUTRAL from OUTPERFORM. The positive surprises in the result were Vodafone's FY20 EBITDA being closer to the top of its guidance range than the bottom, and the decision to maintain the 2H20 dividend at 11cps. However, CDC FY21 guidance was lower than expected, recent share price performance and an -NZ12cps pull back of our net asset value assessment (NAV) to NZ$5.52 has resulted in the discount to NAV falling to -13.2%. We have trimmed our target price -NZ10cps to NZ$4.80.

CDC&nbsp;delivers expected growth, but we're struggling with the value

CDC delivered the expected FY20 EBITDA growth (up +63% on FY19 to A$117.5m), but the FY21 EBITDA guidance of A$145m to A$155m was lower than expected. The main issue appears to be a decline in EBITDA/MW used, which we estimate has fallen -13% in the past six-months, far more than expected. However, data centres are market darlings at present, with CDC's closest comparator, NextDC, trading on a 38x FY20 EBITDA multiple. Notwithstanding the strong growth in the data centre market, our DCF struggles to justify that lofty valuation metric, such that our CDC DCF valuation is -31% than the implied EV/EBITDA based valuation.

Dividend decision a minor surprise, shows&nbsp;IFT's&nbsp;confidence in outlook — but is it sustainable?

In its early April 2020 market update IFT indicated it was likely to trim the 2H20 dividend. In the end it decided to maintain the NZ11cps final dividend — a strong signal the IFT is confident its businesses will manage the COVID-19 economic downturn well. Whilst we assume that IFT will maintain the current full year NZ17.25cps dividend in the coming years, free cash flows from IFT's investments will not be sufficient to cover the dividend in the next three years. This is not an unusual situation for IFT and the Tilt Renewables (TLT) A$170m capital return will fund dividend payments in FY21 and most of FY22. However, long-term dividend sustainability relies on CDC and Vodafone earnings growth and Wellington Airport (WIAL) subvention payments returning to pre COVID-19 levels by FY24. At present the next dividend change is weighted to the downside.

Discount to&nbsp;NAV&nbsp;closes up in recent weeks, rating pulled back to NEUTRAL

We have lowered our IFT NAV -NZ12cps to NZ$5.52 with modest changes to several businesses (none of them material in their own right). The decline in our NAV assessment has led to the -NZ10cps fall in our target price to NZ$4.80. Over recent weeks IFT has been a strong share price performer, which has seen the discount to NAV close up from a low of ~-39% in late March 2020, to -13.2% now. That compares to a long-term average discount to NAV of ~-20% and the last five years average of -18%. The lower than average discount to NAV, flat at best near-term dividend profile, and slower expected NAV growth in the coming months are the main factors behind our decision to lower our rating to NEUTRAL from OUTPERFORM.




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




 Infratil: Stretching Data Centre Growth — FY20 Result

Infratil Ltd

Infratil: Stretching Data Centre Growth — FY20 Result