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>No Change in Direction — 1H21 Result Review</h2>
<div></div>
<p><strong>NEUTRAL</strong></p>
<p>Vector's (VCT) 1H21 EBITDA result of NZ$274m was better than expected (+NZ$17m better) due to a strong performance in its Networks division and was up +3.5% on 1H20. However, the result was driven by the retention of loss rental rebates totalling NZ$21.1m. The good result saw VCT upgrade FY21 EBITDA guidance +NZ$20m, to between NZ$500–NZ$520m, up from&nbsp;NZ$480m–NZ$500m. We have lifted our FY21 EBITDA forecast +NZ$17m to NZ$513m. Given the recent rise in interest rates we&nbsp; foresee near term headwinds for high yield stocks and retain our NEUTRAL rating.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/190/488/original/image_51984132251614125838107.png?1614125842" class="editor-image img-responsive" data-smartkarma-image-id="190488"></figure>
<div>
<h3>What's changed?&nbsp;</h3>
</div>
<div id="m_841310006038875717iwrmo3-2">
<ul>
<li><strong>Earnings</strong>:&nbsp;Modest upgrades: FY21 EBITDA +3% to NZ$513m, FY22 and FY23&nbsp;+1% to NZ$525m and NZ$552m respectively</li>
<li><strong>Target price:</strong>&nbsp;Lowered -6% to NZ$4.20&nbsp;from NZ$4.45, due to an increased WACC caused by&nbsp;rising bond rates</li>
</ul>
</div>
<div>
<h3>Main story in result is the strong Network performance despite the regulatory price cut</h3>
</div>
<div id="m_841310006038875717iagjt">
<p>VCT's 1H21 EBITDA of NZ$274m was up +NZ$10m on 1H21 with growth coming from the continued smart meter roll out (+NZ$7m), a strong Network performance (+NZ$7m), offset by the expected lower Gas Trading contribution (-NZ$6m). The upside vs. our forecasts came from the retention of loss rental rebates (LRR) of NZ$21m. LRRs are a function of the wholesale electricity market. In the past VCT returned LRRs to customers, but in 1H21 VCT retained LRRs in order to smooth customer price movements. The regulatory electricity price increase on 1 April 2021 will now be lower than it otherwise would have been. Whilst it appears VCT is retaining LRRs at the expense of customers, customers will still benefit, just in a later period than previously.</p>
</div>
<div>
<h3>Target price reduction largely a result of WACC increase</h3>
</div>
<div id="m_841310006038875717inta2">
<p>We now forecast&nbsp;FY21 EBITDA to be NZ$513m, up +NZ$17m on our previous forecasts due to the inclusion of the retained&nbsp;LRRs. We have made only modest&nbsp;changes to our longer dated earnings expectations. However, we have lowered our target price -25cps (-6%) to NZ$4.20, primarily as a result of cost of capital assumption changes.&nbsp;In the past few months 10 year bond rates have increased sharply, back to near pre COVID-19 levels. This has resulted in&nbsp;VCT's&nbsp;cost of capital rising&nbsp; +0.5% to 5.3%. Whilst our DCF is only down -3% (higher interest rates boost regulatory earnings), we are now targeting a higher dividend yield.</p>
</div>
<div>
<h3>CCC report and the impacts on VCT</h3>
</div>
<div id="m_841310006038875717iz3lg">
<p>The Climate Change Commission's (CCC) draft report has several implications for VCT. The push to adopt EVs has been well canvassed, however, the proposal to ban new LPG and gas connections from 2025 is new. Whilst it is too early to assess potential value implications, banning LPG/gas connections will negatively impact VCT's gas network business and LPG business. This will be offset by increased electricity network investment and returns to enable VCT to meet peak electricity demand requirements as households transition to electricity for cooking, space heating and hot water.</p>
</div>
<div>
<div>
<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>
<div></div>
</div>
</div>
<div>
<div>
<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
</div>
</div>

Vector No Change in Direction — 1H21 Result Review

NEUTRAL
Vector's (VCT) 1H21 EBITDA result of NZ$274m was better than expected (+NZ$17m better) due to a strong performance in its Networks division and was up +3.5% on 1H20. However, the result was driven by the retention of loss rental rebates totalling NZ$21.1m. The good result saw VCT upgrade FY21 EBITDA guidance +NZ$20m, to between NZ$500–NZ$520m, up from&nbsp;NZ$480m–NZ$500m. We have lifted our FY21 EBITDA forecast +NZ$17m to NZ$513m. Given the recent rise in interest rates we&nbsp; foresee near term headwinds for high yield stocks and retain our NEUTRAL rating.


What's changed?&nbsp;



Earnings:&nbsp;Modest upgrades: FY21 EBITDA +3% to NZ$513m, FY22 and FY23&nbsp;+1% to NZ$525m and NZ$552m respectively
Target price:&nbsp;Lowered -6% to NZ$4.20&nbsp;from NZ$4.45, due to an increased WACC caused by&nbsp;rising bond rates



Main story in result is the strong Network performance despite the regulatory price cut


VCT's 1H21 EBITDA of NZ$274m was up +NZ$10m on 1H21 with growth coming from the continued smart meter roll out (+NZ$7m), a strong Network performance (+NZ$7m), offset by the expected lower Gas Trading contribution (-NZ$6m). The upside vs. our forecasts came from the retention of loss rental rebates (LRR) of NZ$21m. LRRs are a function of the wholesale electricity market. In the past VCT returned LRRs to customers, but in 1H21 VCT retained LRRs in order to smooth customer price movements. The regulatory electricity price increase on 1 April 2021 will now be lower than it otherwise would have been. Whilst it appears VCT is retaining LRRs at the expense of customers, customers will still benefit, just in a later period than previously.


Target price reduction largely a result of WACC increase


We now forecast&nbsp;FY21 EBITDA to be NZ$513m, up +NZ$17m on our previous forecasts due to the inclusion of the retained&nbsp;LRRs. We have made only modest&nbsp;changes to our longer dated earnings expectations. However, we have lowered our target price -25cps (-6%) to NZ$4.20, primarily as a result of cost of capital assumption changes.&nbsp;In the past few months 10 year bond rates have increased sharply, back to near pre COVID-19 levels. This has resulted in&nbsp;VCT's&nbsp;cost of capital rising&nbsp; +0.5% to 5.3%. Whilst our DCF is only down -3% (higher interest rates boost regulatory earnings), we are now targeting a higher dividend yield.


CCC report and the impacts on VCT


The Climate Change Commission's (CCC) draft report has several implications for VCT. The push to adopt EVs has been well canvassed, however, the proposal to ban new LPG and gas connections from 2025 is new. Whilst it is too early to assess potential value implications, banning LPG/gas connections will negatively impact VCT's gas network business and LPG business. This will be offset by increased electricity network investment and returns to enable VCT to meet peak electricity demand requirements as households transition to electricity for cooking, space heating and hot water.



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





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Vector: No Change in Direction — 1H21 Result Review

Vector Ltd

Vector: No Change in Direction — 1H21 Result Review