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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Vector</h2>
Imputing a Lower Gross Dividend — FY19 Result Review
Vector (VCT) produced a mixed FY19 result, with EBITDA up +3% to $486m. Two thirds of the growth was from an accounting change and there was a -$47m write-off of a recently acquired asset. As expected, VCT declared a fully imputed final dividend of 8.25cps, although we believe the dividend is under pressure due to the low interest rate environment.
What’s changed?
<ul>
<li>Earnings: FY20 EBITDA increased +$13m to $499m</li>
<li>Target Price: Target price unchanged at $3.20</li>
<li>Rating: UNDERPERFORM rating retained</li>
</ul>
Meter business the only real shining light in dull FY19 result
VCT’s metering business delivered EBITDA growth of +$12m and with accounting changes adding a further +$11m; putting into context the +$16m EBITDA growth VCT achieved in FY19. Gas Trading had a difficult year as VCT was impacted by the Pohokura gas outage and the Network division faced lower gas regulatory earnings and higher maintenance costs. However, the biggest disappointment was the E-Co Products business, acquired in early 2017. VCT has written down its book value -$47m, ~50% of the acquisition cost. Normalised NPAT of $130m was -$1m lower than the pcp, with higher depreciation costs offsetting the increase in EBITDA.
No formal FY20 guidance due to regulatory uncertainty
With the Commerce Commission’s (ComCom) final electricity price reset decision due late November, VCT has not provided earnings or dividend guidance. The low interest rate environment is problematic for VCT given its importance in the regulatory WACC and therefore electricity price reset decision. Other important factors in the price reset are the opex and capex allowances that VCT will be given.
Fully imputed dividend may become a thing of the past
VCT again said its dividend policy will be reviewed following the ComCom decision. However, it also reiterated the importance of maintaining its BBB credit rating. After further consideration, we believe VCT will continue to grow its headline dividend, but will no longer fully impute the dividend. At year end VCT had prepaid $105m of tax and it is questionable how long VCT can keep prepaying tax in order to pay a fully imputed dividend. We have lifted our FY20 dividend forecast +0.25cps to 16.75cps, but assume it will be 70% imputed.
Positive earnings forecast changes, but capex is increasing too
We have lifted our FY20 EBITDA forecast +$13m to $499m, mainly due to differences in the FY19 result flowing into later years. However, there is little change to our valuation, as we have also lifted our capex assumption (+11%) as the metering business looks to grow faster than previously forecast.
<div class="content-highlight">
Investment View
Our rating is UNDERPERFORM. Whilst Vector (VCT) offers a solid dividend yield there is some downside risk to the gross dividend from low interest rates impacting on the electricity regulatory price reset. At this point in time we prefer other high yielding investments over VCT.
</div>
Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185

Vector
Imputing a Lower Gross Dividend — FY19 Result Review
Vector (VCT) produced a mixed FY19 result, with EBITDA up +3% to $486m. Two thirds of the growth was from an accounting change and there was a -$47m write-off of a recently acquired asset. As expected, VCT declared a fully imputed final dividend of 8.25cps, although we believe the dividend is under pressure due to the low interest rate environment.
What’s changed?

Earnings: FY20 EBITDA increased +$13m to $499m
Target Price: Target price unchanged at $3.20
Rating: UNDERPERFORM rating retained

Meter business the only real shining light in dull FY19 result
VCT’s metering business delivered EBITDA growth of +$12m and with accounting changes adding a further +$11m; putting into context the +$16m EBITDA growth VCT achieved in FY19. Gas Trading had a difficult year as VCT was impacted by the Pohokura gas outage and the Network division faced lower gas regulatory earnings and higher maintenance costs. However, the biggest disappointment was the E-Co Products business, acquired in early 2017. VCT has written down its book value -$47m, ~50% of the acquisition cost. Normalised NPAT of $130m was -$1m lower than the pcp, with higher depreciation costs offsetting the increase in EBITDA.
No formal FY20 guidance due to regulatory uncertainty
With the Commerce Commission’s (ComCom) final electricity price reset decision due late November, VCT has not provided earnings or dividend guidance. The low interest rate environment is problematic for VCT given its importance in the regulatory WACC and therefore electricity price reset decision. Other important factors in the price reset are the opex and capex allowances that VCT will be given.
Fully imputed dividend may become a thing of the past
VCT again said its dividend policy will be reviewed following the ComCom decision. However, it also reiterated the importance of maintaining its BBB credit rating. After further consideration, we believe VCT will continue to grow its headline dividend, but will no longer fully impute the dividend. At year end VCT had prepaid $105m of tax and it is questionable how long VCT can keep prepaying tax in order to pay a fully imputed dividend. We have lifted our FY20 dividend forecast +0.25cps to 16.75cps, but assume it will be 70% imputed.
Positive earnings forecast changes, but capex is increasing too
We have lifted our FY20 EBITDA forecast +$13m to $499m, mainly due to differences in the FY19 result flowing into later years. However, there is little change to our valuation, as we have also lifted our capex assumption (+11%) as the metering business looks to grow faster than previously forecast.

Investment View
Our rating is UNDERPERFORM. Whilst Vector (VCT) offers a solid dividend yield there is some downside risk to the gross dividend from low interest rates impacting on the electricity regulatory price reset. At this point in time we prefer other high yielding investments over VCT.

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

Vector: Imputing a Lower Gross Dividend — FY19 Result Review

Vector Ltd

Vector: Imputing a Lower Gross Dividend — FY19 Result Review