Daily ShareChat: Vector

By Jenny Ruth

Monday 25th April 2011

The Commerce Commission's surprise move to change its regulatory goalposts for electricity lines companies earlier this month effectively reduces Vector's value by 5%, says Grant Swanepoel, an analyst at Craigs Investment Partners.

The effect of the Commerce Commission's change in thinking is that, under its previous guidelines, firms were able to earn about an 8.7% return on assets after tax before any price adjustment was made but now the allowable rate of return is only 7.7%.

"We believe that this change means that Vector would need to cut prices by 7% (including a 1% claw back) in regulatory year 2012," Swanepoel says. "We had assumed a 4% total cut in prices."

"This change continues to highlight the regulatory uncertainty around this company. . . the change is extremely negative for Vector," he says.

Vector's electricity lines business accounts for about 65% of earnings before interest, tax, depreciation and amortisation.

Swanepoel is expecting Vector to report a $197 million net profit for the year ending June but has cut his 2012 forecast from $176 million to $171 million and his 2013 forecast from $178 million to $170 million.

He has cut his valuation of Vector shares by 5% to $2.55.

Another key uncertainty is whether Vector can secure gas supply contracts for its wholesale gas business, he says.

Recommendation: hold.

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