Vector Limited

Company Overview: New Zealand-based company, Vector Limited (NZX: VCT) is a network infrastructure company delivering energy and communication services. Its Regulated Networks segment includes Auckland electricity and gas distribution services; Gas Trading segment includes natural gas and liquefied petroleum gas (LPG) sales, storage and processing, and cogeneration; and Technology segment includes metering services, telecommunications and new energy solutions. The Company's gas brand, OnGas, promotes both piped and bottled gas supply to customers throughout New Zealand. Moreover, VCT owns and operates gas processing facilities at Kapuni in South Taranaki.

VCT Details

Vector Limited (NZX: VCT) is New Zealand’s leading network infrastructure company which runs a portfolio of businesses delivering energy and communication services to more than one million homes and commercial customers throughout the country. The market capitalisation of the company stood at ~$4.3 billion on 25^th January 2021.

Results Performance (Three months ended 30 September 2020)

Despite New Zealand being at alert level 1 and Auckland at alert level 2, the company continued to operate essential services across electricity, gas, fibre and metering business during the September quarter. The company’s electricity network connections in the first quarter period stood at 582,990, an increase of 1.7% on the previous corresponding period (pcp). Its gas network connections increased by 2.0% (on pcp) to 114,584. There was 9.2% growth in advanced meter whereas gas distribution volume was down by 2.3% over the same period last year.

Exhibit 1: Data for 3 Months Ended September 30, 2020

(Source: Company Reports)

Top Shareholders: The top 10 shareholders together form around 77.02% of the total shareholding while the top 5 constitutes the maximum holding. Entrust and The Vanguard Group, Inc. are holding a maximum stake in the company at 75.10% and 0.60%, respectively, as also highlighted in the chart below:

Exhibit 2: Entrust Holds the Largest Share

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

A Quick Look at Key Metrics: The company’s gross margin, EBITDA margin and net margin for FY20 stood at 63.0%, 44.2% and 7.5%, better than the FY19 result of 61.2%, 42.0% and 6.4%, respectively, implying an improvement in the company’s operational efficiency.

Exhibit 3: Key Metrics

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Results Performance (Year Ended 30 June 2020)

The company’s adjusted earnings before interest, tax, depreciation and amortisation (Adjusted EBITDA) for FY20 (ended on June 30, 2020) stood at $490.0 million, an increase of $4.2 million on the previous year.

Adjusted EBITDA for Regulated Networks was down $29.4 million (8.0%) against the prior year at $337.6 million. This can be attributed to the DPP3 price reset which came into effect on 1 April 2020 and saw prices reduce by 6.9%; higher maintenance activity linked to the improvement in reliability and resilience of the network; as well as the impact of COVID-19, which saw lower volumes across electricity and gas networks after Alert Level 4 lockdown began on 25 March 2020.

The company’s total electricity network connections in the full year period increased by 1.6% to 580,060; and gas network connections increased by 2.1% to 113,960. Other developments include 6.6% lift in 9kg LPG bottle swaps, along with 10.0% growth of advanced meter fleet.

Gas Trading adjusted EBITDA improved by $2.6 million (on pcp) to $33.9 million. The Gas Trading result benefitted from improved Natural Gas margin and higher Liquigas throughput.

As a result of continued growth in advanced meter deployments in New Zealand and Australia, adjusted EBITDA for Vector’s metering segment grew $16.1 million (11.6%) to $154.8 million.

The Board of Directors declared a final dividend of 8.25 cents per share (cps) imputed at 10.5%, taking the total dividend (partially imputed) figures to 16.5 cps.

Exhibit 4: Segment Adjusted EBITDA

 (Source: Company Reports)

There was an increase in operating cash flow by 14.1% at $397.3 million, mainly due to lower interest paid, higher receipts associated with loss rental rebates, and higher capital contributions. Capital contributions increased by 9.0% to $86.4 million during the year, resulting from continued connection growth and significant infrastructure development taking place across Auckland.

Economic net debt to economic net debt plus adjusted equity rose to 55.2% from 52.2% at the beginning of the year, and the company raised over NZ$1.1 billion of debt in the financial year, utilizing both the domestic and the US markets.

Exhibit 5: Cash Flow Statement

(Source: Company Reports)

Outlook:

Although the company’s business was impacted and continued to be impacted by COVID-19, the quarter ended June 2020 highlighted continued growth in Auckland which has been driving strong network connection numbers across electricity and gas networks. The company’s partnership with Amazon Web Services (AWS) to jointly develop the New Energy Platform will bring better efficiency in the energy segment. Besides, VCT would continue to explore partnerships in its endeavor of decarbonization and the electrification of vehicles and bring innovation and customer-centric solutions to the market.

VCT is targeting adjusted EBITDA in the range of $480 million to $500 million for the coming financial year.

Valuation Methodology: Price/Cash Flow Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters,  Analysis by Kalkine Group

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

The stock has given a stronger close on the first trading session of the ongoing week, forming a ‘Bullish Harami’ pattern on the chart which suggests a continuation of the existing uptrend. The technical indicator RSI with a reading around 57 and a curve at the end pointing up, indicates strong bullish momentum for the stock.

Going forward, the stock may have resistance around the previous high of $4.65 whereas support could be around the lower Bollinger band of $4.09.

Stock Recommendation:

The Board of the company remains confident about the strategy of continuing to drive progress towards an innovative energy group providing sustainable returns to stakeholders through a diverse portfolio of business.

Considering the aforesaid facts, we have valued the stock using P/CF multiple based valuation (on an illustrative basis) and there are expectations that the stock price might witness an upside of low double-digit (in % terms). We expect the stock to trade at a slight premium to peer average multiple considering strong growth drivers such as partnership with AWS, improvement in ROE, decent operational efficiency, and diverse portfolio.

Hence, we give a “Buy” recommendation on the stock at the current market price of NZ$4.300 per share on January 25, 2021.

VCT Daily Technical Chart (Source: Refinitiv (Thomson Reuters))

Disclaimer            

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