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</h2>
Talked the Talk, Now to Walk the Walk
Infratil’s (IFT) investor day showcased its high growth business, CDC and its most recent acquisition, Vodafone. The CDC story is now familiar and it again highlighted the undoubted potential in the business. Vodafone is more of a turnaround story, and whilst there is clearly upside opportunity the 30%+ EBITDA margin target will require excellent execution as well as no material negative surprises. Our net asset value assessment ($5.58), target price ($4.83) and rating (OUTPERFORM) are unchanged.
Canberra Data Centres (CDC) continues to grow — quickly
CDC provided a story similar to IFT’s April investor day (and earlier investor days). The growth opportunity remains in front of CDC. The data centre market is still growing quickly with no indication of price pressure or a material slowing of growth.
From an earnings perspective CDC provided a small guidance increase, adding +A$10m to its FY20 EBITDA range, so the range is now A$110m to A$120m (our forecast is A$110m). Run rate EBITDA as at 31 March 2020, also added +$10m to the top of the range to A$135m to A$145m. Whilst there is no formal FY21 guidance, indications are FY21 EBITDA growth will be at least +20% and could be as high as +50% if sign-up rates are strong. We currently forecast FY21 EBITDA run rate growth of +30%, as the under construction Sydney data centre fills up.
Vodafone’s (VOD) work is just beginning
VOD provided an aspiration to grow its EBITDA margin from the current &lt;23% to “low-30s%”, which implies EBITDA growth of ~+$200m.&nbsp;IF&nbsp;VOD can achieve that, IFT’s valuation upside is substantial (at least +$400m NAV, ~+60cps — we assume ~26% margins in four years). Areas where VOD expects to generate earnings growth are: cost out (VOD is aiming to reduce costs -20%, its main source of near-term growth); moving to a single IT platform (currently VOD uses four legacy platforms from various acquisitions); 5G leadership (VOD will be first to market in December); fixed wireless opportunity reducing input costs (VOD is looking to grow from ~10% to between 20% and 30%); and nominal revenue improvement (this also depends on the market).
Execution is key. Whilst there are obvious improvements that can be made (e.g. single IT platform, improving customer service), it will not be easy. Monetising 5G investment is not a given and will require market discipline. In addition, we note that VOD ARPU’s are above those of Spark, a premium which will have to be retained.&nbsp;
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Investment View
Our rating is OUTPERFORM. IFT has a solid core of investments that will perform well in a low interest rate environment. Near-term valuation upside comes from CDC growth and Vodafone operational improvements with other core portfolio investments providing good downside protection.&nbsp;
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<a target="_blank">Andrew Harvey-Green</a>
<a target="_blank">andrew.harvey-green@forsythbarr.co.nz</a>
<a target="_blank">+64 4 495 8185</a>

Infratil
Talked the Talk, Now to Walk the Walk
Infratil’s (IFT) investor day showcased its high growth business, CDC and its most recent acquisition, Vodafone. The CDC story is now familiar and it again highlighted the undoubted potential in the business. Vodafone is more of a turnaround story, and whilst there is clearly upside opportunity the 30%+ EBITDA margin target will require excellent execution as well as no material negative surprises. Our net asset value assessment ($5.58), target price ($4.83) and rating (OUTPERFORM) are unchanged.
Canberra Data Centres (CDC) continues to grow — quickly
CDC provided a story similar to IFT’s April investor day (and earlier investor days). The growth opportunity remains in front of CDC. The data centre market is still growing quickly with no indication of price pressure or a material slowing of growth.
From an earnings perspective CDC provided a small guidance increase, adding +A$10m to its FY20 EBITDA range, so the range is now A$110m to A$120m (our forecast is A$110m). Run rate EBITDA as at 31 March 2020, also added +$10m to the top of the range to A$135m to A$145m. Whilst there is no formal FY21 guidance, indications are FY21 EBITDA growth will be at least +20% and could be as high as +50% if sign-up rates are strong. We currently forecast FY21 EBITDA run rate growth of +30%, as the under construction Sydney data centre fills up.
Vodafone’s (VOD) work is just beginning
VOD provided an aspiration to grow its EBITDA margin from the current &lt;23% to “low-30s%”, which implies EBITDA growth of ~+$200m.&nbsp;IF&nbsp;VOD can achieve that, IFT’s valuation upside is substantial (at least +$400m NAV, ~+60cps — we assume ~26% margins in four years). Areas where VOD expects to generate earnings growth are: cost out (VOD is aiming to reduce costs -20%, its main source of near-term growth); moving to a single IT platform (currently VOD uses four legacy platforms from various acquisitions); 5G leadership (VOD will be first to market in December); fixed wireless opportunity reducing input costs (VOD is looking to grow from ~10% to between 20% and 30%); and nominal revenue improvement (this also depends on the market).
Execution is key. Whilst there are obvious improvements that can be made (e.g. single IT platform, improving customer service), it will not be easy. Monetising 5G investment is not a given and will require market discipline. In addition, we note that VOD ARPU’s are above those of Spark, a premium which will have to be retained.&nbsp;

Investment View
Our rating is OUTPERFORM. IFT has a solid core of investments that will perform well in a low interest rate environment. Near-term valuation upside comes from CDC growth and Vodafone operational improvements with other core portfolio investments providing good downside protection.&nbsp;

Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185

Infratil: Talked the Talk, Now to Walk the Walk

Infratil Ltd

Infratil: Talked the Talk, Now to Walk the Walk