New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Infratil<br>1H21 Result&nbsp;— Value In, Cash Out</h2>
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<p><strong>NEUTRAL</strong></p>
<p>We walk away with three main takeaways from&nbsp;IFT's&nbsp;1H21 result; (1)&nbsp;Vodafone, after various adjustments, experienced a modest organic decline in EBITDAF — even&nbsp;if we add back the guided direct impact of COVID-19; (2) management appears comfortable with current leverage levels and view "ad-hoc" cash injection from&nbsp;Longroad/other and/or asset sales to likely be sufficient to cover cash needs; (3) CDC continues to be the main driver of net asset value growth, but is also likely to drive continued performance fees. We make numerous minor asset value adjustments and move Wellington Airport (WIA),&nbsp; CDC and&nbsp;Vodafone&nbsp;NZ to a peers based market multiple approach. Our target price increases by 5cps to NZ$6.00.&nbsp;</p>
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<h3>CDC and&nbsp;Vodafone&nbsp;the key drivers of value creation (or not) at IFT</h3>
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<p>CDC and&nbsp;Vodafone&nbsp;NZ make up ~50% our estimate of&nbsp;IFT's&nbsp;gross asset value&nbsp;but &nbsp;c.80% of its net asset value. Performance of&nbsp;IFT's&nbsp;shares from here is likely largely dependent on&nbsp;these two un-listed assets.&nbsp;The 1H21&nbsp;result&nbsp;re-affirmed&nbsp;what has been clear for sometime;&nbsp;Vodafone&nbsp;NZ faces a long road ahead to approach Spark's profitability and so far it has little to show. After adjusting for many moving parts, we arrive at a guided&nbsp;organic FY21 EBITDAF decline of c.-3% for&nbsp;Vodafone&nbsp;NZ, excluding COVID-19 impacts (~-17% including COVID-19 impacts). CDC delivered EBITDA growth of 44% vs&nbsp;pcp.&nbsp;This was in-line with guidance, however, it is still a very&nbsp;strong result. Importantly, CDC continues to predictably deliver on its growth pathway, set out several years ago. This suggests&nbsp;the&nbsp;25% p.a.&nbsp;EBITDA growth that CDC management "expects to continue" is realistic, particularly in light of the current development pipeline of ~300MW, more than 2x its current installed base.&nbsp;</p>
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<h3>Leverage is high; increased risks but also increased opportunities</h3>
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<p>Of IFT's main five assets, four are now relatively highly levered at the portfolio level. Both CDC and WIA (FY23) have net debt/EBITDA &gt;6x on our estimates and Trustpower (TPW) and Vodafone NZ have net debt/EBITDA of &gt;3x. IFT owns these levered assets with a ~30% gearing and we estimate that look through net debt/EBITDA is around 7x for the structure as a whole. This is not necessarily a negative but it increases the need for flawless execution, active cash management and open debt and equity markets. IFT has proven themselves to be a good buyer of assets, but in particular a good seller of assets. Going forward we believe that it is likely that we will see further capital increases should WIA or any other portfolio company need an equity injection, a generally higher asset velocity in the portfolio and a higher beta of IFT's share price.&nbsp;</p>
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<h3>Performance fees here to stay, hopefully</h3>
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<p>IFT accrued a further NZ$58m of performance fees in 1H21, the majority related to yet another re-valuation of CDC. If CDC continues on its 25% p.a. EBITDA growth trajectory, and with no obvious end point for the valuers to work off, we would expect that the valuer will acknowledge the growth delivered and potentially add ~25%, to CDC's EV each year. On our estimates this translates to an annual performance fee of ~NZ$60m–NZ$70m p.a.&nbsp;</p>
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<div><strong>Aaron Ibbotson CFA</strong></div>
<div><a href="mailto:aaron.ibbotson@forsythbarr.co.nz" target="_blank" rel="noopener">aaron.ibbotson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 9 368 0024</div>
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<div><strong>Matt Montgomerie</strong></div>
<div><a href="mailto:matt.montgomerie@forsythbarr.co.nz" target="_blank" rel="noopener">matt.montgomerie@forsythbarr.<wbr>co.nz</a></div>
<div>+64 9 368 0124</div>
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Infratil 1H21 Result&nbsp;— Value In, Cash Out

NEUTRAL
We walk away with three main takeaways from&nbsp;IFT's&nbsp;1H21 result; (1)&nbsp;Vodafone, after various adjustments, experienced a modest organic decline in EBITDAF — even&nbsp;if we add back the guided direct impact of COVID-19; (2) management appears comfortable with current leverage levels and view "ad-hoc" cash injection from&nbsp;Longroad/other and/or asset sales to likely be sufficient to cover cash needs; (3) CDC continues to be the main driver of net asset value growth, but is also likely to drive continued performance fees. We make numerous minor asset value adjustments and move Wellington Airport (WIA),&nbsp; CDC and&nbsp;Vodafone&nbsp;NZ to a peers based market multiple approach. Our target price increases by 5cps to NZ$6.00.&nbsp;


CDC and&nbsp;Vodafone&nbsp;the key drivers of value creation (or not) at IFT


CDC and&nbsp;Vodafone&nbsp;NZ make up ~50% our estimate of&nbsp;IFT's&nbsp;gross asset value&nbsp;but &nbsp;c.80% of its net asset value. Performance of&nbsp;IFT's&nbsp;shares from here is likely largely dependent on&nbsp;these two un-listed assets.&nbsp;The 1H21&nbsp;result&nbsp;re-affirmed&nbsp;what has been clear for sometime;&nbsp;Vodafone&nbsp;NZ faces a long road ahead to approach Spark's profitability and so far it has little to show. After adjusting for many moving parts, we arrive at a guided&nbsp;organic FY21 EBITDAF decline of c.-3% for&nbsp;Vodafone&nbsp;NZ, excluding COVID-19 impacts (~-17% including COVID-19 impacts). CDC delivered EBITDA growth of 44% vs&nbsp;pcp.&nbsp;This was in-line with guidance, however, it is still a very&nbsp;strong result. Importantly, CDC continues to predictably deliver on its growth pathway, set out several years ago. This suggests&nbsp;the&nbsp;25% p.a.&nbsp;EBITDA growth that CDC management "expects to continue" is realistic, particularly in light of the current development pipeline of ~300MW, more than 2x its current installed base.&nbsp;


Leverage is high; increased risks but also increased opportunities


Of IFT's main five assets, four are now relatively highly levered at the portfolio level. Both CDC and WIA (FY23) have net debt/EBITDA &gt;6x on our estimates and Trustpower (TPW) and Vodafone NZ have net debt/EBITDA of &gt;3x. IFT owns these levered assets with a ~30% gearing and we estimate that look through net debt/EBITDA is around 7x for the structure as a whole. This is not necessarily a negative but it increases the need for flawless execution, active cash management and open debt and equity markets. IFT has proven themselves to be a good buyer of assets, but in particular a good seller of assets. Going forward we believe that it is likely that we will see further capital increases should WIA or any other portfolio company need an equity injection, a generally higher asset velocity in the portfolio and a higher beta of IFT's share price.&nbsp;


Performance fees here to stay, hopefully


IFT accrued a further NZ$58m of performance fees in 1H21, the majority related to yet another re-valuation of CDC. If CDC continues on its 25% p.a. EBITDA growth trajectory, and with no obvious end point for the valuers to work off, we would expect that the valuer will acknowledge the growth delivered and potentially add ~25%, to CDC's EV each year. On our estimates this translates to an annual performance fee of ~NZ$60m–NZ$70m p.a.&nbsp;



Aaron Ibbotson CFA
aaron.ibbotson@forsythbarr.co.nz
+64 9 368 0024





Matt Montgomerie
matt.montgomerie@forsythbarr.co.nz
+64 9 368 0124



Infratil: 1H21 Result — Value In, Cash Out

Infratil Ltd

Infratil: 1H21 Result — Value In, Cash Out