Future Fuel Storage Contracts Will Support Long Term Earnings Resilience

Catalysts

About Channel Infrastructure NZ

Channel Infrastructure NZ operates nationally critical fuel storage and terminal infrastructure that underpins New Zealand's transport and energy supply chains.

What are the underlying business or industry changes driving this perspective?

• New and extended multi year storage contracts, including the Transmix contract and the nine year extension adding a total of about $170 million of contracted revenue, provide high visibility of cash flows and support sustained EBITDA and dividend capacity.
• Execution of large capital projects such as the Z Energy jet storage conversion, the private storage program and the bitumen import terminal, all due to contribute from the second half of 2026, is expected to add incremental fee based revenue while leveraging existing fixed cost infrastructure to lift net margins.
• Structural growth in aviation and tourism demand over the medium term, supported by government tourism promotion and new international routes, combined with Channel's aviation infrastructure position, may translate into higher throughput and resilient revenue.
• Rising national fuel and energy security requirements, including minimum diesel stockholding obligations and potential capacity constraints in the electricity market, create new infrastructure service opportunities at Marsden Point that can increase recurring revenue and improve earnings quality.
• Development of future fuels projects at the Marsden Point Energy Precinct, including the proposed biorefinery and potential e SAF initiatives, could allow Channel to participate in long haul aviation and heavy transport decarbonisation trends and support longer term earnings and asset values.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Channel Infrastructure NZ's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.7% today to 22.0% in 3 years time.
• Analysts expect earnings to reach NZ$39.2 million (and earnings per share of NZ$0.1) by about December 2028, up from NZ$26.2 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as NZ$49.1 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 34.9x on those 2028 earnings, down from 44.3x today. This future PE is lower than the current PE for the NZ Oil and Gas industry at 44.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.1%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Successful execution of multiple contracted growth projects such as the private storage program, Z Energy jet tank conversion and the bitumen import terminal, together with the additional 9 year Transmix storage extension adding a total of about $170 million in contracted revenue, could structurally lift fee based revenue and normalized free cash flow. This could support higher earnings and dividends than the current share price implies, which may drive the share price higher by expanding or at least sustaining valuation multiples while earnings grow.
• Channel's strategic positioning in aviation and future fuels through projects like the Seadra biorefinery and Fortescue e SAF, combined with New Zealand tourism promotion and new airline routes, could accelerate long term jet fuel and SAF related throughput. This may improve revenue resilience and potentially expand EBITDA margins as incremental volumes leverage existing fixed cost infrastructure, which could push the share price above current levels as investors price in durable growth in earnings.
• Rising national fuel and energy security requirements, including increased minimum diesel stockholding obligations and potential electricity capacity constraints, may create additional high value storage and capacity peaking opportunities at Marsden Point. This would add new recurring revenue streams and enhance net margins, supporting higher long term earnings and potentially a re rating of the share price.
• The broadened target leverage range of net debt to EBITDA between 3 and 4.5 times and a shadow BBB to BBB plus credit profile give management more balance sheet flexibility to fund value accretive projects in New Zealand and Australia. If these opportunities earn returns above the weighted average cost of capital as targeted, they could materially increase EBITDA and free cash flow, which could lead to rising dividends and a higher share price over time.
• The step change in dividend payout ratio to 70 to 90 percent of normalized free cash flow, the introduction of a dividend reinvestment plan and a planned ASX foreign exempt listing that opens access to a broader investor base and FTSE Global Small Cap index inclusion in 2025, may increase demand for the stock and support a higher valuation multiple as income and index investors accumulate shares. This could lift the share price faster than earnings alone would suggest.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of NZ$2.72 for Channel Infrastructure NZ based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$3.0, and the most bearish reporting a price target of just NZ$2.52.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be NZ$178.2 million, earnings will come to NZ$39.2 million, and it would be trading on a PE ratio of 34.9x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of NZ$2.82, the analyst price target of NZ$2.72 is 3.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.