Vector ($VCT.NZ) is a New Zealand owner and operator of network infrastructure (electricity, gas and communications). $VCT.NZ is one of the few large New Zealand companies that have successfully navigated the recent New Zealand corporate governance controversies.  $VCT.NZ is trading in the middle of their 52-week range.  How is this in relation to the intrinsic value of the company’s shares?

Valuecruncher valuation model of $VCT.NZ with interactive assumptions

Valuecruncher produces a valuation of NZ$1.92 for $VCT.NZ. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 4.0% below the current share price of NZ$2.00.

Assumptions

• Revenue: Reuters aggregates seven analysts covering $VCT.NZ and the mean estimates of 2009 revenues are NZ$1.187 billion. For our analysis we have used NZ$1.185 billion in 2009, NZ$1.200 billion in 2010 and NZ$1.215 billion in 2011.
• Profitability: We have used a flat EBITDA margin of 47.0% to 2011. Reuters has $VCT.NZ‘s EBITD margin at 44.7% last year and an average of 49.7% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of NZ$205.0 million per annum moving forward.
• Discount Rate: 7.0%. The PwC New Zealand cost of capital report has $VCT.NZ at a WACC of 7.2% with the wider NZ market at 9.5%.
• Terminal Growth Rate: 2.5%.

Our analysis incorporates the cash and debt on the $VCT.NZ balance sheet – Valuecruncher calculates a net debt number.

Play with our assumptions – what does your analysis say?

Disclosure: None

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.

Revenue Growth

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 

EBIT margins are projected forward at the current rate of 32%.

Discount Rate (WACC) 

The WACC used for this analysis is 10%. 

Terminal Growth 

Terminal growth has been set at 2%.    

Vector Valuation Report