Vector Limited

Company Overview: Vector Limited (NZX: VCT) is a New Zealand-based infrastructure company that owns and manages a portfolio of energy and fibre optic.  It is involved in the distribution of electricity and gas, metering installation, natural gas & LPG, fibre optic networks. The Company's electricity lines and cables deliver power around to 544,510 homes and businesses on behalf of electricity retailers and maintain and operates around 1.5 million electricity and gas meters. The Company's gas brand, OnGas, promotes both piped and bottled gas supply to customers throughout New Zealand.  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 ~$4.04 billion on 16^th August 2021.

Looking at the past performance, VCT’s topline for FY16-20 grew with a compounded annual growth rate (CAGR) of 3.11%. Its total revenue for FY20 stood at $1,294.0 million, as compared to $1,144.6 million in FY16.

Exhibit 1: Operating Performance

(Source: Company Reports, Analysis by Kalkine Group)

Operational Performance (For Nine Months ended 31 March 2021)

Improvement in Electricity Connection Numbers: The company reported an increase in total electricity connection numbers in the year to 31 March 2021, by 1.7% over the previous corresponding period (pcp). However, electricity volume for the nine-month period fell 1.6% as compared with the same period to 31 March 2020, because of reduced activity from the industrial as well as commercial sectors due to pandemic.

Gas Network Customers Number Improved: The company reported an increase in gas distribution network customers  of 2.1% in total connections, which can be attributed to the continued growth of Auckland. However, gas distribution volume over the 9 months fell 2.8% as compared to the corresponding period in the prior year.

Increase in Metering Business: Despite a competitive market, both in New Zealand and Australia, advanced meter numbers increased by 8.7% on March 2020. The company has installed more than 360,000 advanced meters in Australia.

Initiatives to Improve Network Resilience: System Average Interruptions Duration Index (SAIDI) minutes for the 12 months ended 31^st March 2021 were 21.5% lower than the prior year. This was mainly due to the significant initiatives in order to improve network resilience despite ongoing challenges because of weather events, traffic congestion as well as vegetation.

Exhibit 2: Financial Data For 9 Months Ended 31st March 2021

Key Data (Source: Company Reports)

Results Performance (Half-Year ended 31 December 2020 – H1FY21)

NPAT up ~27% YoY: The company’s net profit for the interim period for the period stood at $102.1 million,  an increase of 26.8%  on the previous corresponding period (pcp), despite the uncertainties that have arisen due to Covid – 19 and resultant decline of 7.4% in revenue of the company to $647.7 million.

Adjusted EBITDA up 3.5% YoY: Adjusted EBITDA for the interim period increased by 3.5% YoY to $273.8 million that got positively impacted by improved regulatory and metering performance.

The Board declared an interim dividend of 8.25 cents per share  with imputation rate of 10.5%.

Cash Balance Improved: The company’s cash balance at the end of the period stood at $31.8 million, as compared to $29.2 million  in the previous half year period. An increase in cash balance was supported by an increase in cash from operating activities which grew by 6.8% during the period to $271.3 million over the same period last year.

Exhibit 3: Income Statement

Income Statement (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the pie chart , which together form  around 76.97% of the total shareholding. Entrust and The Vanguard Group, Inc. are holding a maximum stake in the company at 75.10% and 0.59%, respectively, as provided in the table below:

Exhibit 4 : Top 10 Shareholders

A Quick Look at Key Metrics: The company’s gross margin and  EBITDA margin  for H1FY21 stood at 69.0% and  50.2% , better than the H1FY20 result of 63.0% and  44.3%, respectively, implying an improvement in the company’s operational efficiency. Its cash cycle for H1FY21 stood at 66.7 days, better than the H1FY20 figure of 70.7 days, implying that the company efficiently managed its asset-liability balances.  The current ratio remained steady at 0.38x for H1FY21 compared to the same period last year.

Exhibit 5 : Key Metrics

Recent Update:

The company, on 30 July 2021, announced that it would release its financial results for the year ended 30 June 2021 on 24 August 2021.

Outlook:

Strong Collaboration with Partners: The company is working closely with its partners to deliver advanced energy solutions, such as the development of a next-generation advanced meter platform to reduce the processing time for meter data as well as analytical solutions for  its customers. It is expected to advance its Symphony strategy while continuing to focus on business resilience and delivery of  its essential services.  Its nine months ended 31 March 2021 operational performance reflects on strong demand for network connections across electricity, gas and metering that augur well for the growth of the company.  

Upward Revision in FY21 Guidance: The company has upwardly revised its adjusted EBITDA guidance from the range of $480 - $500 million to $500 - 520 million for the coming financial year.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation:

The company continues to invest in innovative technologies and infrastructure with the objective of  transforming the way the energy is consumed. It is working closely with its partners (strategic alliance with Amazon Web Services (AWS)) to deliver advanced energy solutions, such as the development of a next-generation advanced meter platform to reduce the processing time for meter data as well as analytical solutions for retailer customers.

The stock has been valued using EV/Sales multiple-based illustrative relative valuation and have arrived at a target price that reflects a rise of low double-digit (in % terms). A slight premium to EV/Sales Multiple (NTM) (Peer Average) has been applied considering improved liquidity position which could help the company in navigating tough operating conditions. Also, the company’s net income improved in H1 FY 2021 on the YoY basis.

Hence, we give a “Buy” recommendation on the stock at the current market price of NZ$4.040 per share, up by 0.75% on 16^th August 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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