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Infratil stock undervalued after Z selldown, Wellington Airport worth more, broker says

Monday 7th October 2013

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Infratil stock is about 20 percent undervalued given the performance of its investment in Z Energy, the likely avoidance of regulation for Wellington International Airport and a foreign exchange gain, according to First NZ Capital.

The brokerage resumed coverage of Infratil with an 'outperform' rating following the end of a research restriction due to its role in the sale of 60 percent of Z Energy for Infratil and the New Zealand Superannuation Fund in August. It has a 12-month target price of $3, compared to its recent trading price of $2.495. Net asset value was lifted to $2.99 from $2.26 at March 31.

First NZ analysts said the current discount is "excessive" given Infratil's financial flexibility, which is allowing the investment company to buy back up to $64.5 million of shares while still funding organic growth and new investments.

The discount may reflect a lack of capital growth in its biggest investment, 50.5 percent of TrustPower, in recent years and concern about the potential threat from regulation should a Labour-Greens coalition win next year's elections. That uncertainty, though, is largely priced into the electricity sector and TrustPower's investment in Australian wind farms "should produce a decent earnings uplift".

"Though few near-term catalysts exist, on a 12-month view, we expect Infratil's shares to be re-rated as TrustPower's earnings growth resumes," the brokerage said.

First NZ estimates Infratil's total cash return from Z Energy since it paid $210 million for a 50 percent stake in 2010 is $500 million including net IPO proceeds while its remaining 20 percent holding is worth $318 million.

Infratil is likely to book a gain of about $187 million for the selldown of Z Energy in the 2014 year while the revaluation of its remaining Z Energy shares may amount to about $189 million, boosting reported earnings by between $370 million and $380 million, it said. The brokerage is forecasting Infratil's 2014 earnings before interest and tax to jump to around $749 million from $296.5 million in 2013.

"The outstanding returns (from Z Energy) were a function of a very attractive entry price, a 50 percent lift in underlying EBITDA and investor appreciation of the company's strong market position and cashflow attributes," the brokerage said.

In addition, the rebranding to Z Energy from Shell "was handled extremely well" and went along with investment in tank storage, systems and an improved service station offering, it said.

By contrast, the brokerage has fully written off Infratil's investment in its struggling Infratil Airports Europe business, previously valued at $15 million. It values Infratil Energy Australia at $476 million, below Infratil's valuation of $559 million to $703 million, mainly reflecting a lower value for the customer base at its Lumo Energy electricity and gas business.

Z Energy shares rose 0.5 percent to $4.01 and are now about 15 percent above the IPO price of $3.50 a share.

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