Bluecurrent's Smart Meter Rollout And DPP4 Will Create Future Opportunities

Key Takeaways

• Strategic adjustments in regulated pricing and smart meter installations present significant opportunities for revenue and margin growth.
  
• Revised dividend policy and capital contributions from infrastructure projects position Vector for improved shareholder returns and expanded network capacity.
  
• Leadership change, divestment, and economic slowdown introduce volatility, narrow focus, and financial challenges, affecting potential growth, strategic direction, and profitability.

Catalysts

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

• Vector is in the last phase of the DPP3 regulatory period, with DPP4 starting in April 2025, which could result in increased revenue due to an uplift in regulated pricing. This is a forward-looking catalyst for revenue growth.
  
• Future growth is expected from continued electricity price adjustments to reflect historic inflation, a process allowed by the regulatory model with a two-year lag. This could bolster revenue and margins as prices are adjusted upwards.
  
• The full-scale rollout of smart meters in Australia by 2030 presents an opportunity for Vector's joint venture, Bluecurrent, to increase meter installations, potentially driving revenue growth and earnings over the next decade.
  
• Vector's new dividend policy links to cash flow and distribution of 70-100% of free cash flow, potentially boosting shareholder returns and attractiveness of the stock, benefiting EPS and net margins over time.
  
• Increased capital contributions expected from new data centers and infrastructure projects like the KiwiRail project point to potential future growth in network capacity and connections, aiding revenue and possibly increasing net margins.

Vector Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vector's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.8% today to 19.5% in 3 years time.
• Analysts expect earnings to reach NZ$257.8 million (and earnings per share of NZ$0.24) by about May 2028, up from NZ$177.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as NZ$208.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.2x on those 2028 earnings, down from 22.5x today. This future PE is lower than the current PE for the NZ Integrated Utilities industry at 22.4x.
• 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 6.61%, as per the Simply Wall St company report.

Vector Future Earnings Per Share Growth

Risks

• The upcoming change in leadership with Simon MacKenzie stepping down as CEO introduces uncertainty and potential disruption, which could impact strategic direction and financial performance. (Earnings)
  
• The divestment of the Gas Trading segment indicates a narrowing of business focus, which could limit future revenue sources and diversification. (Revenue)
  
• The company’s high levels of historic inflation-driven electricity price increases are temporarily beneficial but depend on regulatory pricing lag, which can introduce volatility and unpredictability in revenue. (Revenue)
  
• The continued net losses at Bluecurrent due to depreciation and amortization indicate ongoing financial challenges in this joint venture, impacting overall profitability. (Net margins)
  
• Economic slowdowns are reflected in decreased new connections across all segments, signaling potential future reductions in revenue growth. (Revenue)

Valuation

• The analysts have a consensus price target of NZ$4.31 for Vector based on their expectations of its future earnings growth, profit margins and other risk factors.
• 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$257.8 million, and it would be trading on a PE ratio of 20.2x, assuming you use a discount rate of 6.6%.
• Given the current share price of NZ$3.98, the analyst price target of NZ$4.31 is 7.7% 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.