Unlocking Value in Channel Infrastructure NZ: A Strategic Reconciliation of Low Returns and Growth Potential

The paradox of Channel Infrastructure NZ Limited (NZSE:CHI) lies in its ability to sustain robust earnings growth despite modest return metrics. While its return on equity (ROE) of 5.5% and return on capital employed (ROCE) of 4.3% for FY24 trail industry averages, the company has delivered a 25% five-year earnings growth rate and a 177% total shareholder return. This article dissects the strategic rationale behind this apparent contradiction, revealing why CHI's valuation may still be undervalued—and why now is the time to act.

The ROE/ROCE Conundrum: A Matter of Scale and Strategy

ROE and ROCE are traditionally seen as proxies for capital efficiency, but CHI's story is one of strategic capital deployment rather than pure operational leverage. The company's ROE is constrained by its substantial equity base ($499 million), which has grown through retained earnings and capital raises. Meanwhile, ROCE's 4.3% reflects the denominator effect of its $1.3 billion total assets, yet the metric has improved by 259% over five years, signaling enhanced efficiency.

The key is understanding where CHI is allocating capital:

1. High-ROI Contracted Growth: Three new storage contracts signed in FY24 will generate ~$120 million (pre-indexation) in revenue over 15 years, with a capex outlay of $55–66 million. This implies a 182–218% revenue-to-investment ratio, far exceeding ROCE's headline figure. Such projects are the engine of earnings growth, insulated from commodity price volatility through long-term agreements.
2. Strategic Land and Asset Appreciation: The $381 million fair value uplift in terminal systems and undeveloped land has boosted net tangible assets (NTA) to $1.98 per share. These assets underpin future projects like the Marsden Point Energy Precinct, which could unlock synergies in New Zealand's energy transition.

Earnings Growth: Built on Volume, Contracts, and Resilience

CHI's earnings momentum is rooted in:
- Fuel Throughput Growth: A 3% rise to 3.5 billion liters, driven by jet fuel demand and stable diesel/petrol usage.
- PPI Indexation: Automatic price adjustments in terminal fees, which have historically outpaced inflation.
- Private Storage Revenue: New contracts and storage expansions contributed meaningfully to FY24's 9% EBITDA increase to $95.1 million.

The company's FY25 guidance—$89–94 million EBITDA, with free cash flow aligned to FY24 levels—suggests this trajectory will continue. Crucially, stay-in-business capex (8–10% of revenue) remains disciplined, freeing capital for high-return projects.

The Dividend: A Buffer of Confidence

CHI's dividend policy is a testament to its financial strength. The FY24 payout of 11 cents per share (up 5%) maintains a 69% payout ratio, slightly above its 60–70% target. While this might signal reliance on free cash flow, the company's normalized FCF of $63.4 million comfortably covers distributions. The dividend's consistency—paired with a 177% five-year total return—suggests investors are already valuing CHI's resilience.

Valuation: The Untapped Upside of Energy Transition

CHI's current valuation does not yet fully account for its strategic initiatives:
- Marsden Point Energy Precinct: Designated a potential Special Economic Zone, this site could host a biorefinery and e-SAF production facility, leveraging CHI's terminal infrastructure. Such projects align with New Zealand's net-zero goals, offering decades of contracted revenue.
- Partnership Pipeline: The conditional agreement with Seadra Energy and airline/financial partners underscores CHI's ability to monetize its land and expertise in decarbonization.

At $1.98 NTA per share and a current stock price of ~$4.50 (as of May 2025), the market is pricing in future value creation. However, with $381 million in asset revaluation yet to be fully realized through projects, there is room for upside as these initiatives materialize.

The Investment Case: Why Act Now?

The market's focus on low ROE/ROCE metrics risks undervaluing CHI's structural advantages:
1. Defensible Asset Base: Its terminals and land are critical infrastructure with no direct competitors.
2. Contracted Cashflows: Over 60% of FY25 revenue is already committed via long-term agreements, reducing execution risk.
3. Energy Transition Catalysts: Marsden Point and biorefinery projects position CHI as a beneficiary of decarbonization trends, a theme investors are increasingly willing to pay a premium for.

Risks to Consider

• Project Delays: Marsden Point's approval timeline or partner commitments could lag, delaying revenue.
• Regulatory Shifts: Changes to energy policies or PPI indexation rules might impact margins.
• Commodity Volatility: Though hedged via contracts, broader economic downturns could suppress fuel demand.

Conclusion: A Rare Opportunity in Energy Infrastructure

Channel Infrastructure NZ is a paradox wrapped in concrete—low returns on equity and capital, yet high returns on strategic projects. Its disciplined capex, contracted growth, and undervalued asset base create a compelling risk-reward profile. With a 177% five-year total return and a stock price that has yet to fully reflect its energy transition upside, CHI presents a rare chance to invest in a company poised to benefit from both existing strengths and future megatrends.

The time to act is now. The market may be overlooking the forest for the trees, but investors who recognize CHI's infrastructure moat and growth catalysts stand to profit as these undervalued assets finally catch the light.