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Vector profit slides 44% on struggling HRV writedown

Friday 23rd August 2019

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Vector reported a 44 percent slide in annual profit as the lines company wrote down the value of its HRV home ventilation unit, which has failed to fire since it was bought in 2017.

Operating earnings were in line with expectations and the electricity, gas, and telecommunications distribution company hiked its dividend payment. However, lingering regulatory uncertainty means it won't offer guidance for the 2020 financial year until November. 

The company still relies on its regulated distribution businesses which account for more than half its revenue and two-thirds of earnings. And while it has been diversifying away into battery storage technology, telecommunications connections, home ventilation and solar power, not all of those have been winners. 

Vector bought PowerSmart Solar and home ventilation firm E-Co Products, better known as HRV, in early 2017 for a combined $91 million as a means to further broaden its energy services. However, it today wrote down the value of HRV by $46.6 million due to the unit's underperformance. 

"As a result of the disappointing performance of E-Co Products Group leading to impairment, we have new leadership in place and have repositioned the business with our other technology solutions, through Vector PowerSmart," chief executive Simon Mackenzie said. 

The restructuring is expected to return HRV to profitability, the company said. 

The impairment weighed on Vector's net profit, which fell to $84 million in the 12 months ended June 30 from $149.8 million a year earlier. Revenue dipped 0.7 percent to $1.32 billion. 

Vector's board declared a final dividend of 8.25 cents per share to be paid on Sept. 16 to shareholders registered at Sept. 9. That takes the annual payment to 16.5 cents, up from 16.25 cents a year earlier.

Underlying earnings before interest, tax, depreciation and amortisation rose to $485.8 million from $470.1 million a year earlier, falling in the middle of its forecast for earnings of $480-490 million. 

Vector chair Alison Paterson reiterated that the company will review its dividend policy and provide earnings guidance once the Commerce Commission makes a final decision on the lines company's upcoming five-year regulated pricing period. The draft decision in May indicated Vector's regulated prices will fall by 3.5 percent in the first two years of the next cycle, which starts in April 2020.

Paterson said infrastructure investment becomes even more important to the wider economy during periods of ultra-low interest rates and pressures on growth. 

"I worry that aspects of regulatory settings risk harming incentives to invest by not being aligned to the uncharted territory we are now in. Inflation within regulatory settings has been consistently over-forecast without correction for a decade," she said in the annual report.

"It cannot continue because it has the effect of significantly reducing cashflow available for critical infrastructure investment. Settings must adapt to changing times and regulation is no exception." 

Vector estimates flawed regulatory forecasting has cost it about $270 million in lost revenue since 2013. It said it's working with the regulator to explore all options in addressing the interest rate and inflation challenges. 

Capital expenditure rose 12 percent to $425.1 million, reflecting a spending programme to match Auckland's continued growth, greater network replacement work, and an accelerated roll-out of smart meters in New Zealand and Australia. 

Vector's net debt rose to $2.63 billion as at June 30 from $2.38 billion a year earlier, lifting its gearing ratio to 52.2 percent from 48.8 percent. 

The company's shares closed at $3.63 yesterday. They have increased 9 percent so far this year, lagging behind a 22 percent gain on the S&P/NZX 50 Index over the same period. 


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