Auckland Urban Growth And Digital Transformation Will Reshape Electricity Markets

Key Takeaways

• Urban growth and electrification trends, along with regulatory changes, are expected to drive steady growth in revenue and improve earnings quality.
  
• Focus on digital transformation, smart technologies, and strategic partnerships should boost operational efficiency and expand future margins.
  
• Structural decline in gas, regulatory uncertainty, rising distributed energy, heavy capital needs, and leadership transition all threaten revenue stability and long-term profit growth.

Catalysts

Engages in electricity and gas distribution, telecommunication and new energy solutions businesses in New Zealand.

• Higher expected long-term electricity demand from Auckland's ongoing urban growth and accelerating electrification (including EV adoption) is likely to drive steady growth in regulated asset base, supporting sustainable increases in regulated revenues.
  
• Regulatory resets (DPP4) have resulted in a step-up in allowed distribution revenues beginning April 2025, and with ongoing customer-driven network connections, this should underpin robust revenue growth and enhanced EBITDA over the next regulatory cycle.
  
• The company's digital transformation and deployment of smart technologies (e.g., GridAware AI, Bluecurrent metering) are set to improve operational efficiency and reduce unnecessary capex, which should expand net margins over time.
  
• Sale of non-core and underperforming assets (such as Ongas, Liquigas, and HRV) allows Vector to focus capital on higher-growth regulated electricity and value-adding technology segments, which is likely to improve overall earnings mix and margin quality.
  
• Strategic partnerships (e.g., with X (Google), AWS, Tapestry) continue to drive next-generation network innovation, strengthening Vector's ability to capture emerging service revenues and reinforcing long-term earnings growth.

Vector Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vector's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.0% today to 21.4% in 3 years time.
• Analysts expect earnings to reach NZ$269.3 million (and earnings per share of NZ$0.25) by about August 2028, up from NZ$154.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NZ$316 million in earnings, and the most bearish expecting NZ$211.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.6x on those 2028 earnings, down from 29.1x today. This future PE is lower than the current PE for the NZ Integrated Utilities industry at 29.6x.
• 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 6.9%, as per the Simply Wall St company report.

Vector Future Earnings Per Share Growth

Risks

• Persistent uncertainty and structural decline in the gas distribution business, driven by New Zealand's 2050 net zero emissions targets and falling gas demand, has resulted in asset impairments and increases the risk of revenue and earnings erosion from this segment over the medium to long term.
  
• Heavy reliance on regulated pricing cycles (such as the DPP4 reset every five years) introduces significant regulatory risk and earnings variability; inability to predict future allowed returns or regulatory changes may compress net margins or cap revenue growth.
  
• Increasing customer adoption of distributed energy resources (DERs), like rooftop solar and batteries, combined with technical changes to connection funding rules, could reduce dependency on centralized infrastructure and erode Vector's traditional electricity revenue base over time.
  
• High and ongoing capital expenditure requirements for network upgrades, maintenance, and digital transformation-amid uncertain demand growth and possible delays in customer-driven projects-threaten to constrain free cash flow, dampen dividend growth, and put pressure on net profit.
  
• Management transition risk due to the CEO's imminent departure after 17 years introduces potential disruption in strategic continuity, with possible impacts on operational efficiency and long-term earnings growth.

Valuation

• The analysts have a consensus price target of NZ$4.77 for Vector 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$5.15, and the most bearish reporting a price target of just NZ$4.24.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NZ$1.3 billion, earnings will come to NZ$269.3 million, and it would be trading on a PE ratio of 21.6x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of NZ$4.5, the analyst price target of NZ$4.77 is 5.7% higher. 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.