Valuecruncher places a mid-point valuation of $3.65 per share on lines company Horizon Energy with a sensitivity range of $3.46 to $3.85. At the time of the valuation Horizon was trading at $3.50.
Horizon Business Summary
Horizon’s core business is delivering electricity from the Transpower operated national grid to approximately 23,000 customers in the Eastern Bay of Plenty. The Commerce Commission set the pricing framework for lines companies such as Horizon in 2004 based on a price-threshold calculated as a function of inflation. This price threshold and the low growth in electricity demand in the Eastern Bay of Plenty limit Horizon’s growth opportunities. The current pricing framework is in place until 2009. Lines companies are pressing for a revised framework that incorporates the increased costs associated with managing and upgrading distribution networks, particularly in low population density regions. Horizon is looking to develop non-regulated business units to generate growth and recently set up a contracting arm that focus on lines maintenance, tree inspection and cutting services.
NZ Electricity Distribution
The fragmented nature of the regional electricity distribution companies would typically lend itself to consolidation. The ownership structure (typically community trusts) and the limited commercial viability of low-density distribution networks under the current regulatory environment has limited the consolidation of smaller players. As a listed entity Horizon would be well placed to play a leading role in any consolidation of regional lines companies.
Valuecruncher has assumed that revenues will grow at a constant 3% based on the regulatory framework and expected electricity demand growth. The financial projections assume that Horizon maintain their current EBIT margins (27.6%). Valuecruncher has used a cost of capital of 8%.
Uncertainty and Risks
In the long-term the key-uncertainty facing Horizon is what pricing framework will be implemented in 2009, this will have a significant impact the re-investment strategy adopted by lines companies. In the short-term the key risk is the impact of adverse weather events on profitability.
Comparable Company Analysis
Vector is the only other listed company in New Zealand involved in electricity distribution. Vector has limited relevance as a comparable company due to it’s larger size and range of business units, including gas sales and distribution. Horizon is currently trading at an EV/EBITDA multiple of 10 compared to Vector at 9.4.