Daily ShareChat: Vector

By Jenny Ruth

Monday 13th September 2010

Electricity lines company Vector's annual results were solid and in line with expectations but regulatory issues mean investors should be very cautious about owning the shares, says Jason Lindsay at First NZ Capital.

Vector's net profit for the year ended June was $171.4 million, up from $164.8 million the previous year.

"The regulatory environment remains uncertain and the process of bringing Vector under price control is still very much a draft and subject to change," Lindsay says.

"Although Vector (and others) remain unhappy with the suggested WACC (weighted average cost of capital), we think it is unlikely there will be material further movement in this area," he says.

Lindsay is assuming the allowable WACC will be at the mid-point of 8.57% to 8.82% on a 7.5% increase in Vector's regulated asset base.

"Vector reported a return on investment (ROI) for its electricity business of 10.35% for the year to 31 March, 2010." The March 2009 was even less favourable with the ROI at 11.6%, or 11.2% if you strip out the sale of the Wellington network, he says.

"The one risk in being underweight Vector is if the (Commerce) Commission backs down .... which would result in a significant increase in our valuation. We think this is unlikely." Lindsay values the shares at $2.02.

Recommendation: Underperform.

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