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<br>Three Misses and a Bigger WACC — 1H22</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Vector's (VCT) 1H22 result contained three misses from our perspective — the result itself, the interim dividend, and FY22 guidance. 1H22 Adjusted EBITDA was NZ$264m, -NZ$15m lower than expectations and -NZ$10m lower than 1H21. The partially (31%) imputed interim dividend was -0.25cps lower than our forecast and first-time FY22 Adjusted EBITDA guidance of NZ$505m to NZ$515m was also down expectations, leading to our FY22 EBITDA forecast being pulled back -NZ$18m (-3.0%) to NZ$513m. Cost of capital assumption changes and the pull-back in near-term earnings expectations has lowered our target price -20cps (-4.7%) to NZ$4.10. We retain our NEUTRAL rating.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY22/FY23/FY24 EBITDA -NZ$18m/-NZ$12m/-NZ$10m to NZ$513m/NZ$551m/NZ$582m</li>
<li><strong>Target price</strong>:&nbsp;Reduced -20cps (-4.7%) to NZ$4.10</li>
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<h3>Softer than expected underlying result but lift in capital contributions limit bottom line impact</h3>
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<p>The softer than expected result was driven by a lower loss rental rebates retained (NZ$15m lower in 1H22 vs. 1H21) and a surprising decline in metering revenue vs. 2H21 resulting in 1H22 metering EBITDA -NZ$5m lower than forecast. Whilst Adjusted EBITDA of NZ$264m was -NZ$10m lower than 1H21, capital contributions were up +NZ$21m (+42%) following VCT's policy change to seek more up front costs from developers. This led to 1H22 EBITDA up +NZ$11m on 1H21. 1H22 NPAT was up +NZ$2m on 1H21 to NZ$102m. VCT decided to leave its interim dividend unchanged at 8.25cps, -0.25cps lower than our forecast.</p>
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<h3>Forecasts and target price pulled back</h3>
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<p>First-time FY22 Adjusted EBITDA guidance was NZ$505m to NZ$515m. We have pulled back our FY22 Adjusted EBITDA forecast&nbsp;-NZ$18m (-3.0%) to NZ$513m, with the -NZ$15m 1H22 miss the main factor. We still expect VCT will lift its FY22 dividend&nbsp;+0.25cps to 17.0cps but now assume that will happen at the 2H22 result.&nbsp;Our target price is -20cps (-4.7%) lower at NZ$4.10 with the lower earnings a factor. The other factor is the +0.4% increase in our cost of capital to 5.8%. All other things being equal, lifting&nbsp;VCT's&nbsp;WACC would lower our DCF value ~-80cps. The nature of regulatory earnings being linked to interest rates shelters that effect.</p>
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<h3>Gas price reset looking positive, helping near-term earnings growth</h3>
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<p>The&nbsp;ComCom's&nbsp;recent draft gas price reset decision is encouraging and will result in gas revenue increasing ~+NZ$8m&nbsp;in FY23, ~+NZ$4m ahead of our old forecast. Driving the uplift is accelerated deprecation as the&nbsp;ComCom&nbsp;recognises the increased risk of asset stranding following the Climate Change Commission recommendations around long-term natural gas use. Also driving near-term growth is the CPI uplift on regulatory and metering revenue.</p>
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Vector Three Misses and a Bigger WACC — 1H22

NEUTRAL
Vector's (VCT) 1H22 result contained three misses from our perspective — the result itself, the interim dividend, and FY22 guidance. 1H22 Adjusted EBITDA was NZ$264m, -NZ$15m lower than expectations and -NZ$10m lower than 1H21. The partially (31%) imputed interim dividend was -0.25cps lower than our forecast and first-time FY22 Adjusted EBITDA guidance of NZ$505m to NZ$515m was also down expectations, leading to our FY22 EBITDA forecast being pulled back -NZ$18m (-3.0%) to NZ$513m. Cost of capital assumption changes and the pull-back in near-term earnings expectations has lowered our target price -20cps (-4.7%) to NZ$4.10. We retain our NEUTRAL rating.


What's changed?&nbsp;



Earnings:&nbsp;FY22/FY23/FY24 EBITDA -NZ$18m/-NZ$12m/-NZ$10m to NZ$513m/NZ$551m/NZ$582m
Target price:&nbsp;Reduced -20cps (-4.7%) to NZ$4.10



Softer than expected underlying result but lift in capital contributions limit bottom line impact


The softer than expected result was driven by a lower loss rental rebates retained (NZ$15m lower in 1H22 vs. 1H21) and a surprising decline in metering revenue vs. 2H21 resulting in 1H22 metering EBITDA -NZ$5m lower than forecast. Whilst Adjusted EBITDA of NZ$264m was -NZ$10m lower than 1H21, capital contributions were up +NZ$21m (+42%) following VCT's policy change to seek more up front costs from developers. This led to 1H22 EBITDA up +NZ$11m on 1H21. 1H22 NPAT was up +NZ$2m on 1H21 to NZ$102m. VCT decided to leave its interim dividend unchanged at 8.25cps, -0.25cps lower than our forecast.


Forecasts and target price pulled back


First-time FY22 Adjusted EBITDA guidance was NZ$505m to NZ$515m. We have pulled back our FY22 Adjusted EBITDA forecast&nbsp;-NZ$18m (-3.0%) to NZ$513m, with the -NZ$15m 1H22 miss the main factor. We still expect VCT will lift its FY22 dividend&nbsp;+0.25cps to 17.0cps but now assume that will happen at the 2H22 result.&nbsp;Our target price is -20cps (-4.7%) lower at NZ$4.10 with the lower earnings a factor. The other factor is the +0.4% increase in our cost of capital to 5.8%. All other things being equal, lifting&nbsp;VCT's&nbsp;WACC would lower our DCF value ~-80cps. The nature of regulatory earnings being linked to interest rates shelters that effect.


Gas price reset looking positive, helping near-term earnings growth


The&nbsp;ComCom's&nbsp;recent draft gas price reset decision is encouraging and will result in gas revenue increasing ~+NZ$8m&nbsp;in FY23, ~+NZ$4m ahead of our old forecast. Driving the uplift is accelerated deprecation as the&nbsp;ComCom&nbsp;recognises the increased risk of asset stranding following the Climate Change Commission recommendations around long-term natural gas use. Also driving near-term growth is the CPI uplift on regulatory and metering revenue.


Vector: Three Misses and a Bigger WACC — 1H22

Vector Ltd

Vector: Three Misses and a Bigger WACC — 1H22