Vector Limited is a New Zealand infrastructure group that owns and manages a portfolio of energy and fibre optic infrastructure networks in New Zealand.
The primary operations of the group are electricity distribution, gas transportation, natural gas, LPG sales, gas processing, metering and telecommunications. Vector’s main operational segments include: Electricity, Gas Transportation, Gas Wholesale and Technology.
Vector exhibits reasonably predictable earnings as a result of the vast majority of their revenue being generated by regulated assets. While electricity and gas provide a stable level of earnings, the company’s technology businesses, consisting of telecommunications and smart electricity meters, offer higher growth and are not at the whims and fancies of the regulator.
The electricity distribution business is the largest division. The company is the sole distributor of electricity in the region of Auckland, New Zealand’s fastest-growing and most populous city. The network is heavily regulated. Most of the gas transportation assets were sold. However, Vector retains the Auckland gas distribution business, which is also regulated. Regulated distribution networks contribute nearlythree-quarters of the group EBITDA.
The technology business, comprising smart meters and fibre optics, accounts for around a fifth of EBITDA. It is growing earnings relatively steady, with growth mainly coming from new meter installations and adding Spark’s customers to Vector’s fibre-optic network. For the 2016 fiscal year NZ Smart Meter installations increased 17.5%, while new network connections increased 11.4%. Growth in new network connections is expected to continue on the back of Auckland adding the equivalent population of Hamilton every 5 years.
In the medium term, Vector are focused on the large opportunity in New South Wales, South Australia, Queensland and Tasmania. Across these areas there are 6.3 million legacy meters and there are as many as 450,000 new and replacement meters installed each year.
Following the sale of Vector Gas for $952m the company has effectively utilised the proceeds from the sale to pay down debt, materially improving balance sheet health. During the course of fiscal 2016, net debt fell by over 30% to just under NZD $2 billion. Over the long run, the sale proceeds will be redeployed to support growth in Auckland, smart metering, and new energy technologies.
The balance sheet is expected to continue strengthening on the renegotiation of pre global financial crisis (GFC) debt by 2021. A large proportion of Vector’s debt was negotiated prior to the GFC which was at interest rates significantly higher than our current low interest rate environment. Consequently, we would expect Vector to negotiate rates from a range of 7-8% p.a to more realistic interest rates below 5% p.a. The renegotiation of funding facilities will have a direct impact on the free cash flow available to equity holders, supporting dividend growth, which in turn strengthens the value of Vector.
We are confident of Vector’s growth in network connections, electricity distribution and smart meters, on the back of their ambitious growth plans. The company’s growth potential is further strengthened by the Auckland Unitary Plan that provides for a general intensification of residential zones throughout the Auckland region, along with rezoning considerable areas of rural land for residential housing development.
Vector is a reasonably conservative infrastructure company with predictable earnings, favourable market position to support growth and a very reasonable dividend yield for income focussed investors.
P/E: 11.7 times Dividend Yield: 6.8% p.a