Valuecruncher has valued each Vector share at $2.94, with a range of $2.37 to $3.50. The share price closed at $2.78 on the 7th of March.
Vector is subject to significant regulatory uncertainty in it’s core businesses of electricity distribution and gas distribution and transmission. Vector’s electricity distribution is subject to a price path threshold through until 2009 with no regime finalised beyond this point. Threats from the Commerce Commission to take control of Vector’s electricity distribution assets have compounded this uncertainty. These factors restrict the ability to forecast Vector’s revenues and cash flows.
A key valuation variable associated with Vector is the expected capital expenditure. Issues surrounding the regulatory environment resulted in Vector instigating an internal review of all of their potential capital expenditure projects. Valuecruncher has projected capital expenditure to continue at the current level.
Due to the regulatory uncertainty and price path thresholds imposed on Vector’s electricity distribution Valuecruncher has conservatively forecast revenues to grow at 2%.
EBIT margins are projected forward at the current rate of 32%.
Discount Rate (WACC)
The WACC used for this analysis is 10%.
Terminal growth has been set at 2%.