Daily ShareChat: Vector

By Jenny Ruth

Sunday 26th April 2009

Electricity and gas lines company Vector's relatively high return on investment puts it at risk of regulatory action to force it to cut its prices, says Forsyth Barr analyst Andrew Harvey-Green.

As required by the Commerce Commission, Vector recently disclosed its return using the commission's methodology - which is different from the way the company reports its results - was 11.8% for the year ended March 2008, up from 8.8% in 2007.

"Our current estimate of the commission's target WACC (weighted average cost of capital) is 7.5%," Harvey-Green says.

"While the prima facie result does not look positive for Vector, the reality is somewhat different as we expect asset valuation and tax treatment to be two issues hotly contented when the input methodologies are set under the new Commerce Amendment Act regime," he says.

It is by no means certain the current information disclosure requirements will be used in future but Vector's very high regulatory return "highlights that regulatory uncertainty is alive and well."

He expects the company to perform well over the next couple of years but, in the medium term, "we expect Vector's electricity business to be the subject of a significant price reset and continue to see more downside than upside in the gas trading business."

BROKER CALL: Forsyth Barr rates Vector (VCT) as HOLD.

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