Advancing CDC Projects And Manawa-Contact Merger Will Strengthen Future Infrastructure

Key Takeaways

• Advancing projects and customer negotiations at CDC are expected to significantly drive future revenue growth.
  
• Merging Manawa Energy and Contact Energy may yield synergies beneficial for improving net margins.
  
• Regulatory hurdles and market shifts pose risks to revenue growth and strategic initiatives across multiple business segments, potentially impacting overall performance.

Catalysts

An infrastructure investment firm specializing in digital Infrastructure, renewables, and social infrastructure.

• Significant demand growth at CDC, particularly with advancing customer negotiations and ongoing investment in new projects and power capacity, is expected to drive future revenue growth.
  
• The ongoing merger of Manawa Energy and Contact Energy, once approved, may provide synergies beneficial for net margins.
  
• Successful negotiation and potential signing of contracts for 300 megawatts pre-Christmas, and further 100 megawatts in the new year, is a catalyst for future earnings growth at CDC.
  
• The continuous progress of One NZ on strategic priorities, including growth in mobile and wholesale revenue and IT transformations for cost efficiency, indicates potential for improved net margins and earnings.
  
• Longroad’s expansion plans with projects in the U.S., despite political uncertainties, suggest long-term investment in U.S. infrastructure that could significantly enhance future revenue and earnings growth.

Infratil Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Infratil's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.7% today to 7.6% in 3 years time.
• Analysts expect earnings to reach NZ$286.8 million (and earnings per share of NZ$0.26) by about June 2029, up from NZ$269.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NZ$733.9 million in earnings, and the most bearish expecting NZ$-152.5 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 79.3x on those 2029 earnings, up from 56.3x today. This future PE is greater than the current PE for the AU Diversified Financial industry at 32.9x.
• Analysts expect the number of shares outstanding to grow by 2.01% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.58%, as per the Simply Wall St company report.

Risks

• The uncertainty from the U.S. election results and potential rollbacks on green policies like the Inflation Reduction Act pose a risk to Longroad's future projects, potentially affecting the company's revenue generation and growth targets.
  
• The delay in securing Commerce Commission approval for the merger between Manawa Energy and Contact Energy could impact revenue synergies and market position if prolonged.
  
• The inability to proceed with the planned investment in Console Connect highlights potential strategic missteps or market changes that could hinder projected earnings growth in the digital infrastructure space.
  
• One NZ's revenue has been adversely affected by a reduction in low-margin handset sales, which, unless reversed, might continue to impact overall revenues amid a subdued economic environment.
  
• Changing customer requirements and contract negotiations at CDC could lead to delayed capacity coming online, affecting revenue recognition and potentially lowering expected earnings per megawatt.

Valuation

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

• The analysts have a consensus price target of NZ$17.21 for Infratil 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$18.9, and the most bearish reporting a price target of just NZ$14.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be NZ$3.8 billion, earnings will come to NZ$286.8 million, and it would be trading on a PE ratio of 79.3x, assuming you use a discount rate of 7.6%.
• Given the current share price of NZ$15.2, the analyst price target of NZ$17.21 is 11.7% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
• 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.