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<br>Metering Out Earnings and Dividend Growth</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>We upgrade our Vector (VCT) rating to OUTPERFORM due to several factors. 1) the outlook for the 2020s is materially better than the 2010s, 2) the potential upside from the partial&nbsp;sell-down of&nbsp;VCT's&nbsp;metering business, 3)&nbsp;VCT's&nbsp;strong moat and current valuation metrics (refer to our report&nbsp;Real Assets — The GOAT of the Moat).&nbsp;VCT's&nbsp;earnings benefit from a rising interest rate environment (boosts the regulatory cost of capital) and inflation (regulatory and metering earnings are CPI-linked). The partial sell-down of the metering business is the main factor lifting our target price +35cps (+8.5%) to NZ$4.45.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Target price</strong>:&nbsp;Increased +35cps (+8.5%) to NZ$4.45&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;&nbsp;</li>
<li><strong>Rating</strong>:&nbsp;Upgraded to OUTPERFORM from NEUTRAL</li>
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<h3>Intellihub&nbsp;partial sale encourages VCT to have a look at doing the same with its metering business, Advanced Metering Services</h3>
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<p>VCT&nbsp;announced it is undertaking a strategic review of its metering business, AMS. In a recent transaction, 50% of the Australasian&nbsp;Intellihub&nbsp;metering business was sold to&nbsp;Brookfield, reportedly valuing it&nbsp;at A$3.3b. Using the disclosed&nbsp;Intellihub&nbsp;FY24 earnings target implies AMS is worth ~NZ$4.2b, vs. our NZ$3.1b sum-of-the-parts value. We note&nbsp;Intellihub&nbsp;has greater contracted meter growth than AMS. Strategically, we like&nbsp;VCT's&nbsp;decision to test the market, and the potential upside from a partial sale is material.</p>
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<h3>2020s shaping up to be a good decade for VCT, a stark contrast from the 2010s</h3>
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<p>The 2010s was a difficult decade for VCT. Falling interest rates and low inflation impacted regulatory earnings. Whilst headline electricity and gas network EBITDA (excluding the gas transmission network that was sold) rose +~7% to NZ$473m in FY21, all of the growth came from capital contributions, which increased five-fold. Excluding capital contributions, regulatory EBITDAF fell -16% (-1.7% per annum) to NZ$350m. Looking ahead to the 2020s and the opposite is taking place. Rising interest rates and inflation will provide an earnings tailwind for the regulatory businesses. The gas price reset takes effect from 1 October 2022, and is expected to lift gas revenue ~+15% (a final decision is due May 2022). The bigger decision will be November 2024, when electricity prices are reset. Based on current interest rates, the regulatory cost of capital will increase ~+100bp adding ~+NZ$50m (~+6%) to electricity revenue. All up, our regulatory earnings EBITDA forecast increases +45% in the next 10 years to FY31 (~+3.8% per annum).</p>
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<h3>Earnings growth leads to increased dividend growth and a return to fully imputed dividends</h3>
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<p>We expect solid regulatory earnings growth, plus continued metering growth will enable VCT to start lifting its ordinary dividend growth from +0.25cps per&nbsp;annum&nbsp;currently, to ~+0.75cps per&nbsp;annum&nbsp;by the end of the decade. In addition, from FY27, we forecast that VCT will be able to once again pay fully imputed dividends. Forecast cash dividend growth is +2.8% per&nbsp;annum&nbsp;from FY22 to FY27, and is a strong +7.4% per&nbsp;annum&nbsp;on a gross dividend basis.</p>
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Vector Metering Out Earnings and Dividend Growth

OUTPERFORM
We upgrade our Vector (VCT) rating to OUTPERFORM due to several factors. 1) the outlook for the 2020s is materially better than the 2010s, 2) the potential upside from the partial&nbsp;sell-down of&nbsp;VCT's&nbsp;metering business, 3)&nbsp;VCT's&nbsp;strong moat and current valuation metrics (refer to our report&nbsp;Real Assets — The GOAT of the Moat).&nbsp;VCT's&nbsp;earnings benefit from a rising interest rate environment (boosts the regulatory cost of capital) and inflation (regulatory and metering earnings are CPI-linked). The partial sell-down of the metering business is the main factor lifting our target price +35cps (+8.5%) to NZ$4.45.


What's changed?&nbsp;



Target price:&nbsp;Increased +35cps (+8.5%) to NZ$4.45&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;&nbsp;
Rating:&nbsp;Upgraded to OUTPERFORM from NEUTRAL



Intellihub&nbsp;partial sale encourages VCT to have a look at doing the same with its metering business, Advanced Metering Services


VCT&nbsp;announced it is undertaking a strategic review of its metering business, AMS. In a recent transaction, 50% of the Australasian&nbsp;Intellihub&nbsp;metering business was sold to&nbsp;Brookfield, reportedly valuing it&nbsp;at A$3.3b. Using the disclosed&nbsp;Intellihub&nbsp;FY24 earnings target implies AMS is worth ~NZ$4.2b, vs. our NZ$3.1b sum-of-the-parts value. We note&nbsp;Intellihub&nbsp;has greater contracted meter growth than AMS. Strategically, we like&nbsp;VCT's&nbsp;decision to test the market, and the potential upside from a partial sale is material.


2020s shaping up to be a good decade for VCT, a stark contrast from the 2010s


The 2010s was a difficult decade for VCT. Falling interest rates and low inflation impacted regulatory earnings. Whilst headline electricity and gas network EBITDA (excluding the gas transmission network that was sold) rose +~7% to NZ$473m in FY21, all of the growth came from capital contributions, which increased five-fold. Excluding capital contributions, regulatory EBITDAF fell -16% (-1.7% per annum) to NZ$350m. Looking ahead to the 2020s and the opposite is taking place. Rising interest rates and inflation will provide an earnings tailwind for the regulatory businesses. The gas price reset takes effect from 1 October 2022, and is expected to lift gas revenue ~+15% (a final decision is due May 2022). The bigger decision will be November 2024, when electricity prices are reset. Based on current interest rates, the regulatory cost of capital will increase ~+100bp adding ~+NZ$50m (~+6%) to electricity revenue. All up, our regulatory earnings EBITDA forecast increases +45% in the next 10 years to FY31 (~+3.8% per annum).


Earnings growth leads to increased dividend growth and a return to fully imputed dividends


We expect solid regulatory earnings growth, plus continued metering growth will enable VCT to start lifting its ordinary dividend growth from +0.25cps per&nbsp;annum&nbsp;currently, to ~+0.75cps per&nbsp;annum&nbsp;by the end of the decade. In addition, from FY27, we forecast that VCT will be able to once again pay fully imputed dividends. Forecast cash dividend growth is +2.8% per&nbsp;annum&nbsp;from FY22 to FY27, and is a strong +7.4% per&nbsp;annum&nbsp;on a gross dividend basis.


Vector: Metering Out Earnings and Dividend Growth

Vector Ltd

Vector: Metering Out Earnings and Dividend Growth