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>Vector</h2>
Divining the Dividend Policy — 1H20 Preview
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185
UNDERPERFORM&nbsp;
We are expecting Vector (VCT) to reveal a revised dividend policy at its 1H20 result on Tuesday 25 February.&nbsp;VCT&nbsp;has steadily grown its fully imputed dividend following its&nbsp;NGC&nbsp;takeover in 2004. But we believe the fully imputed dividend is about to come to an end, with&nbsp;VCT&nbsp;dropping imputation levels to ~70%. In our view, following the regulatory electricity price cut, which takes effect on 1 April 2020, constantly growing its fully imputed dividend is no longer sustainable. For investors who value imputation credits, dropping the imputation level to 70% is the equivalent of an -8.4% cut in the gross dividend.
<table class="table table-striped"><colgroup><col span="12"></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">VCT</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$3.47</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 48pt;">129.5&nbsp;</td>
<td style="text-align: left; width: 48pt;">135.5</td>
<td style="text-align: left; width: 48pt;">114.3</td>
<td style="text-align: left; width: 48pt;">112.2&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 48pt;">10.6&nbsp;</td>
<td style="text-align: left; width: 48pt;">10.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">11.1</td>
<td style="text-align: left; width: 48pt;">10.8&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target Price</td>
<td style="width: 48pt;">NZ$3.20</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 48pt;">13.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">13.6</td>
<td style="text-align: left; width: 48pt;">11.5</td>
<td style="text-align: left; width: 48pt;">11.3</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 48pt;">18.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">19.6</td>
<td style="text-align: left; width: 48pt;">21.2</td>
<td style="text-align: left; width: 48pt;">20.8&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">Low</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 48pt;">-1.5</td>
<td style="text-align: left; width: 48pt;">4.6&nbsp;</td>
<td style="text-align: left; width: 48pt;">-15.6</td>
<td style="text-align: left; width: 48pt;">-1.9</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 48pt;">26.7</td>
<td style="text-align: left; width: 48pt;">25.5</td>
<td style="text-align: left; width: 48pt;">30.2&nbsp;</td>
<td style="text-align: left; width: 48pt;">30.8&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">995.8m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 48pt;">16.5&nbsp;</td>
<td style="text-align: left; width: 48pt;">16.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">17.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">17.3&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 48pt;">3.5</td>
<td style="text-align: left; width: 48pt;">3.6</td>
<td style="text-align: left; width: 48pt;">3.9</td>
<td style="text-align: left; width: 48pt;">4.1</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$3,455m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="text-align: left; width: 48pt;">70</td>
<td style="text-align: left; width: 48pt;">70</td>
<td style="text-align: left; width: 48pt;">70</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 48pt;">4.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">4.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">4.9&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.0&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">159.1k (NZ$576k)</td>
<td colspan="3" style="width: 144pt;">*Based on normalised profits</td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 48pt;">6.6&nbsp;</td>
<td style="text-align: left; width: 48pt;">6.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">6.2&nbsp;</td>
<td style="text-align: left; width: 48pt;">6.3&nbsp;</td>
</tr>
</tbody>
</table>
1H20 result — what we're expecting
<ul type="disc">
<li>1H20 result date:&nbsp;Tuesday 25 February</li>
<li>1H20&nbsp;EBITDA:&nbsp;$263m (up +1% from $259m in the&nbsp;pcp,&nbsp;excl&nbsp;capital contributions)</li>
<li>1H20&nbsp;EPS:&nbsp;8.4cps (up +8% from 7.7% in the&nbsp;pcp)</li>
<li>​​​​​​​1H20 dividend:&nbsp;8.25cps, 70% imputed (1H19 dividend was 8.25cps, 100% imputed)</li>
</ul>
1H20 result expected to be steady
Our 1H20&nbsp;EBITDA&nbsp;forecast of $263m (pre-capital contributions) is up +1% on the&nbsp;pcp, with the Technology division again expected to lead the way (EBITDA&nbsp;up +8% to $79m). Gas Trading volumes were down in 1H20, hence, we expect a modest decline in the Gas Trading contribution (-$4m to $17m). We are forecasting a largely flat result from the Networks business (up +1% to $195m). The&nbsp;sizeable&nbsp;+8% lift in&nbsp;EPS&nbsp;is driven by a fall in interest costs as&nbsp;high cost debt rolls off.
Dividend policy change likely following negative regulatory price reset
​​​​​​​The key focus of the 1H20 result will be VCT’s dividend policy. VCT has previously indicated it will be updating the market on its dividend policy following the electricity price reset that was announced in late November 2019. VCT’s current dividend policy has resulted in a steady +0.25cps or +0.5cps increase in the fully imputed annual dividend for the past 10 years. However, to maintain a fully imputed dividend, VCT has been prepaying tax for many years, such that prepaid tax on the balance sheet as at 30 June 2019, was $105m. In our view, following the electricity price cut that will come into force on 1 April 2020, VCT's dividend policy is no longer sustainable if VCT wants to maintain its current credit rating. Whilst it has plenty of debt headroom now, that will gradually decline over the coming five years.
We believe&nbsp;VCT&nbsp;is most likely to cut its imputation level&nbsp;to ~70%, from 100%&nbsp;but maintain a gradual ~+0.25cps increase in the cash dividend. This approach enables&nbsp;VCT&nbsp;to pay less tax, gradually reducing its prepaid tax balance and preserving cash. It is also the most tax efficient approach as investors who cannot use imputation&nbsp;credits will see no change to their dividend.&nbsp;

Vector
Divining the Dividend Policy — 1H20 Preview
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185
UNDERPERFORM&nbsp;
We are expecting Vector (VCT) to reveal a revised dividend policy at its 1H20 result on Tuesday 25 February.&nbsp;VCT&nbsp;has steadily grown its fully imputed dividend following its&nbsp;NGC&nbsp;takeover in 2004. But we believe the fully imputed dividend is about to come to an end, with&nbsp;VCT&nbsp;dropping imputation levels to ~70%. In our view, following the regulatory electricity price cut, which takes effect on 1 April 2020, constantly growing its fully imputed dividend is no longer sustainable. For investors who value imputation credits, dropping the imputation level to 70% is the equivalent of an -8.4% cut in the gross dividend.



NZX Code
VCT
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$3.47
NPAT* (NZ$m)
129.5&nbsp;
135.5
114.3
112.2&nbsp;
EV/EBITDA
10.6&nbsp;
10.8&nbsp;
11.1
10.8&nbsp;


Target Price
NZ$3.20
EPS* (NZc)
13.0&nbsp;
13.6
11.5
11.3
EV/EBIT
18.8&nbsp;
19.6
21.2
20.8&nbsp;


Risk rating
Low
EPS growth* (%)
-1.5
4.6&nbsp;
-15.6
-1.9
PE
26.7
25.5
30.2&nbsp;
30.8&nbsp;


Issued shares
995.8m
DPS (NZc)
16.5&nbsp;
16.8&nbsp;
17.0&nbsp;
17.3&nbsp;
Price/NTA
3.5
3.6
3.9
4.1


Market cap
NZ$3,455m
Imputation (%)
100
70
70
70
Cash div yld (%)
4.8&nbsp;
4.8&nbsp;
4.9&nbsp;
5.0&nbsp;


Avg daily turnover
159.1k (NZ$576k)
*Based on normalised profits


Gross div yld (%)
6.6&nbsp;
6.1&nbsp;
6.2&nbsp;
6.3&nbsp;



1H20 result — what we're expecting

1H20 result date:&nbsp;Tuesday 25 February
1H20&nbsp;EBITDA:&nbsp;$263m (up +1% from $259m in the&nbsp;pcp,&nbsp;excl&nbsp;capital contributions)
1H20&nbsp;EPS:&nbsp;8.4cps (up +8% from 7.7% in the&nbsp;pcp)
​​​​​​​1H20 dividend:&nbsp;8.25cps, 70% imputed (1H19 dividend was 8.25cps, 100% imputed)

1H20 result expected to be steady
Our 1H20&nbsp;EBITDA&nbsp;forecast of $263m (pre-capital contributions) is up +1% on the&nbsp;pcp, with the Technology division again expected to lead the way (EBITDA&nbsp;up +8% to $79m). Gas Trading volumes were down in 1H20, hence, we expect a modest decline in the Gas Trading contribution (-$4m to $17m). We are forecasting a largely flat result from the Networks business (up +1% to $195m). The&nbsp;sizeable&nbsp;+8% lift in&nbsp;EPS&nbsp;is driven by a fall in interest costs as&nbsp;high cost debt rolls off.
Dividend policy change likely following negative regulatory price reset
​​​​​​​The key focus of the 1H20 result will be VCT’s dividend policy. VCT has previously indicated it will be updating the market on its dividend policy following the electricity price reset that was announced in late November 2019. VCT’s current dividend policy has resulted in a steady +0.25cps or +0.5cps increase in the fully imputed annual dividend for the past 10 years. However, to maintain a fully imputed dividend, VCT has been prepaying tax for many years, such that prepaid tax on the balance sheet as at 30 June 2019, was $105m. In our view, following the electricity price cut that will come into force on 1 April 2020, VCT's dividend policy is no longer sustainable if VCT wants to maintain its current credit rating. Whilst it has plenty of debt headroom now, that will gradually decline over the coming five years.
We believe&nbsp;VCT&nbsp;is most likely to cut its imputation level&nbsp;to ~70%, from 100%&nbsp;but maintain a gradual ~+0.25cps increase in the cash dividend. This approach enables&nbsp;VCT&nbsp;to pay less tax, gradually reducing its prepaid tax balance and preserving cash. It is also the most tax efficient approach as investors who cannot use imputation&nbsp;credits will see no change to their dividend.&nbsp;

Vector: Divining the Dividend Policy — 1H20 Preview

Vector Ltd

Vector: Divining the Dividend Policy — 1H20 Preview