Vector Limited

Company Overview: Vector Limited (NZX: VCT) is a New Zealand-based company that distributes electricity and gas. The company's Regulated Networks segment consists of Auckland electricity and gas distribution services. Its Gas Trading segment consists of natural gas and LPG sales, storage and processing, and cogeneration. Notably, its technology segment includes metering services, telecommunications as well as new energy solutions.

VCT Details

Vector Limited (NZX: VCT) is New Zealand’s leading network infrastructure company. The company's market capitalisation stood at ~$3.88 billion as on 14^th March 2022.

Looking at the past performance over FY 2018 to FY 2021, the gross profit and bottom line for the company grew with a compounded annual growth rate (CAGR) of 3.5% and 9.2%, respectively.

Exhibit 1: Financial Statistics

Source: Analysis by Kalkine Group

Result Performance for H1FY22 (6 Months Ended 31 December 2021)

• Group net profit after tax rose 13.1%: Vector reported a 13.1% increase in net profit to $115.5 million, a rise from $102.1 million in H1FY21. The increase was a result of higher capital contributions, gain on sale of the 50% share of Treescape and lower interest cost, being partially offset by lower network and gas earnings and higher depreciation and amortisation.
• Revenue increased 5.7%: Vector delivered revenue of $684.6 million, up from $647.7 million in H1FY21. Adjusted EBITDA stood at $263.6 million, down 3.7% on the YoY basis.
• Total CAPEX rose 2.2%: The company’s total capital expenditure was up $5.7 million on the prior comparable period, which reflected continued investment in infrastructure to support Auckland’s growth, the rollout of 4G modem upgrades across the New Zealand advanced meter base, deployment of additional advanced meters in Australia and increasing stock levels to counteract risks associated with global production shortages linked to COVID- 19.
• The Board of Directors declared an interim dividend of 8.25 cents per share.

Exhibit 2: Financial Statistics

Source: Analysis by Kalkine Group

Top 10 Shareholders:  The top 10 shareholders have been highlighted in the table, which together forms around 77.14% of the total shareholding. Entrust and Accident Compensation Corporation are holding maximum stake in the company at 75.1% and 0.8756%, respectively as shown in the following chart:

Exhibit 3: Top 10 Shareholders

Source: Analysis by Kalkine Group

A Quick Look at Key Metrics: 

VCT has posted gross margin of 67.8% in FY 2021 as compared to 63% in FY 2020. It has posted EBITDA Margin of 49.3% in FY 2021 and, in FY 2020, its EBITDA margin was 44.2%. Its current ratio stood at 0.56x in FY 2021 as compared to 0.39x in FY 2020. Therefore, it could be said that VCT is possessing decent liquidity position.

Exhibit 4: Key Metrics

Source: Analysis by Kalkine Group

Operational Performance (For The 6 months Ended 31 December 2021):

Growth in Auckland has continued over the period, with strong network connection numbers across Vector’s electricity and gas networks.  In the year to 31^st December 2021, total electricity connection numbers grew by 1.7%. Electricity distributed volume for the quarter was down 0.3% compared to 6 months ended 31^st December 2020. Residential volumes were up 6.1% and SME/I&C volumes were down 5.3%.

Key Update:

On 30 November 2021, Vector announced the appointment of Dr Paul Hutchison as a director of the company.

Outlook:

The company is investing significantly in infrastructure and complementary innovative technologies.  Vector Powersmart was impacted by Covid-19 pandemic. The focus for this business was towards improving the pipeline of activities within NZ. The company is focusing towards delivering for its customers across the group and unlock opportunities to help decarbonize its energy systems.

Vector expects adjusted EBITDA to be in the range of $505 to $515 million for FY22, provided there are no further significant impacts of COVID-19 on economic activity.

Risks:

The company is exposed to credit, market, and liquidity risk that arises in the normal course of the business. The company is also prone to the risks related to the COVID-19 pandemic. VCT operates in a highly competitive environment and a decrease in market share could affect its business.

Valuation Methodology: Price/EPS Based Relative Valuation (Illustrative)

Technical Overview

Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Performance:

Despite ongoing impacts to the business, the company has robust fundamentals for any further disruptions.

The company has continued to deliver against its objectives during H1 of the financial year and it has also responded to the evolving challenges from Covid-19 pandemic. Throughout the changing Alert Levels, it has maintained the focus towards delivering the essential services for the customers. VCT has also made progress against the Symphony strategy.

The stock has been valued using Price/EPS based relative valuation (on an illustrative basis), and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to Price/EPS Multiple (NTM) (Peer Average) considering the increased sales and decent outlook.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Considering the aforementioned facts and its current trading levels, we give a “Buy” recommendation on the stock at the current market price of NZ$3.84 per share (New Zealand Time: 12:22 PM (GMT +12)) on 14^th March 2022.

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.

Disclaimer

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