Vector Limited

Company Overview: New Zealand-based company, Vector Limited (NZX: VCT) distributes electricity and gas, under segments like Regulated Networks, Gas Trading and Technology. 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 electricity lines and cables deliver power to around 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. 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 ~$4.29 billion on January 11, 2021.

Results Performance (Three months ended 30 September 2020)

The September quarter witnessed a challenge from alert level 3 at Auckland and alert level 2 from across the rest of the country. However, as a lifeline utility, the company continued to operate essential services across the electricity, gas, fibre, and metering businesses. 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). It's gas network connections increased by 2.0% to 114,584 on pcp.

Exhibit 1: 3 Months Ended September 30, 2020

(Source: Company Reports)

Results Performance (Year ended 30 June 2020)

The company’s 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. Approximately, 280,000 advanced meters were installed in Australian market during the year.

The company’s adjusted earnings before interest, tax, depreciation and amortisation (Adjusted EBITDA) for FY20 stood at $490.0 million, an increase of $4.2 million on the previous year. The Group reported a net profit of $97.3 million which includes a non-cash impairment of $32.0 million.

Adjusted EBITDA for Regulated Networks registered a decline by 8% to $337.6 million on pcp due to the DPP3 price reset which saw prices reducing by 6.9% along with higher maintenance costs, and the impact of COVID-19. Besides, lower volumes were witnessed across the electricity and gas networks after Alert Level 4 lockdown began on 25 March 2020.

Gas Trading adjusted EBITDA improved by $2.6 million to $33.9 million on pcp. As a result of continued growth in advanced meter deployments in New Zealand and Australia, adjusted EBITDA for Vector’s metering segment grew by 11.6% to $154.8 million.

Exhibit 2: Key Financial Data

(Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders of the company have been highlighted in the table as shown below. Together, they form around 77.05% of the total shareholding. Entrust and The Vanguard Group, Inc. are holding maximum stake in the company at 75.10% and 0.61%, respectively.

Exhibit 3: Top 10 Shareholders

(Source: Refinitiv (Thomson Reuters))

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 operational efficiency. Cash cycle for FY20 stood at negative 47.7 days, better than the FY19 figure of negative 31.8 days, implying that the company managed the asset-liability balances in an efficient manner.

Exhibit 4: Key Metrics

(Source: Refinitiv (Thomson Reuters))

Recent Update: On November 4 2020, VCT made an announcement about the appointment of current Independent Non-Executive Director, Dame Paula Rebstock, as Deputy Chair of Vector as well as the Interim Chair of VCT’s audit committee.

Outlook:

The company’s partnership with Amazon Web Services (AWS) to jointly develop the New Energy Platform might bring better efficiency in the energy segment. Moreover, VCT will continue to explore partnerships in its endeavor of decarbonization and the electrification of vehicles and bring innovation and customer-centric solutions to the market. The company is committed to growing, advancing, and maintaining the network so that it can continue to deliver and evolve in line with changing energy needs and preferences.

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

Exhibit 5: Key Valuation Metrics

(Source: Refinitiv (Thomson Reuters))

Valuation Methodology: P/E Multiple Based Relative Valuation (illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv (Thomson Reuters))

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

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/

In the first trading session of the ongoing week, the stock has given a stronger closing, closing slightly above 20 periods SMA of $$4.28 at $4.29 thereby reflecting strength in an uptrend. The technical indicator RSI with a reading around 58 and a flattish to up curve at the end, suggests further gaining of bullish momentum.

Going forward, the stock may have resistance around the upper Bollinger band of $4.51 whereas support could be around the previous week’s low of $4.20.   

Stock Recommendation:

In FY20, the company invested around $317.1 million to improve the safety, reliability and resilience of the gas and electricity networks and facilitate Auckland growth, which is a 21.5% lift on the previous year’s investment and reflects ongoing commitment to reduce the frequency and duration of outages across electricity network through a mix of new initiatives and innovative approaches to asset management.

Considering the aforesaid facts, we have valued the stock using Price to Earnings multiple-based valuation (on an illustrative basis) and the target price arrived represents potential double-digit growth (in % terms).

Hence, we give a “Buy” recommendation on the stock at the current market price of NZ$4.29 per share, up by 0.70% on January 11, 2021.

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

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