Investments In Digital Solutions And Alliances With Amazon Web Services And X Will Improve Future Network Capabilities

Key Takeaways

• Strategic alliances and technological investments are set to enhance network capabilities, leading to increased revenue and improved future earnings.
  
• Asset sales and flexible regulatory options could optimize capital allocation, stabilize earnings, and improve the company's financial position.
  
• Regulatory changes and financial vulnerabilities threaten Vector's revenue stability and future growth, impacting its gas distribution business and reliance on capital contributions.

Catalysts

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

• Vector is focusing on increasing network efficiency and resilience, particularly by using digital solutions to manage demand growth and electrification. This is likely to reduce capital expenditure, improve network efficiency, and contribute to stable or improved net margins.
  
• The company's investment in Bluecurrent and offshore opportunities, like the data processing Diverge platform, could lead to increased revenue from technological and metering services, adding to top-line growth.
  
• Vector's strategic alliances with major technology companies, such as Amazon Web Services and the Tapestry project with X (formerly Google X), aim to develop next-generation platforms for network management. This could enhance network capabilities and drive higher future earnings.
  
• The potential regulatory approval of flexible capital re-openers by the Commerce Commission allows Vector to manage capital investments in response to actual demand, which may optimize capital deployment, maintain manageable debt levels, and stabilize earnings through efficient capital allocation.
  
• The ongoing sale of Vector’s LPG and Gas Trading segment could lead to an improved capital structure and provide funds for reinvestment, possibly leading to enhanced earnings and dividend potential in the long run.

Vector Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vector's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 20.6% in 3 years time.
• Analysts expect earnings to reach NZ$254.3 million (and earnings per share of NZ$0.25) by about February 2028, up from NZ$77.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as NZ$209.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.7x on those 2028 earnings, down from 50.3x today. This future PE is lower than the current PE for the NZ Integrated Utilities industry at 50.3x.
• 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 6.29%, as per the Simply Wall St company report.

Vector Future Earnings Per Share Growth

Risks

• Vector's exposure to regulatory changes, such as the Commerce Commission's decision on price quality paths, may lead to increased costs and uncertain customer pricing, impacting revenue stability and growth.
  
• The impairment of Vector's gas distribution business highlights vulnerabilities to regulatory decisions and interest rate changes, potentially affecting future earnings.
  
• The reliance on capital contributions for funding network expansion creates a risk if regulatory or market changes adversely impact these assumptions, potentially affecting net margins.
  
• Bluecurrent's reported net loss due to high interest costs, depreciation, and amortization could weigh on Vector’s overall financial performance in terms of earnings.
  
• Uncertainty around natural gas supply and connections may affect future growth prospects, potentially impacting revenue from gas-related services.

Valuation

• The analysts have a consensus price target of NZ$4.167 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$1.2 billion, earnings will come to NZ$254.3 million, and it would be trading on a PE ratio of 19.7x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of NZ$3.9, the analyst price target of NZ$4.17 is 6.4% 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.