New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

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.

Equity Bottom-Up

<h2>Power Points</h2>
October 2019 — ASX Futures Prices Power On Up
It was another positive month for the electricity sector, with the Electricity Price Review (EPR) containing no big surprises, ASX futures prices firming to record levels and share prices once again outperforming the S&amp;P/NZX50. Wholesale electricity prices were again firm and rose noticeably after month end as hydro lakes continued to fall and a cold snap came over the country.
EPR outcomes lower regulatory risk, for now
The long-awaited EPR contained few surprises. As expected prompt payment discounts, win-backs and the low fixed charge tariffs are to be phased out. There is also expected to be stricter rules on futures market making. The Government is expecting the Electricity Authority (EA) to implement most of the recommendations and plans to review the implementation in two to three years.
Wholesale electricity prices firm as South Island hydro lakes fall
The average OTA price in September was $119/MWh, flat on the pcp, but since month end prices have been above $200/MWh, with hydro lake storage levels now 83% of average due to low South Island storage. The ASX futures prices have risen to record levels, with long-dated BEN prices above $90/MWh for the first time and OTA prices above $102/MWh. Electricity demand was again slightly up on the pcp (+1.2%, +0.8% excluding NZAS demand). We expect Meridian Energy (MEL) has had another good month; however, the outlook is less certain given the lower lake levels. Contact Energy (CEN) has had a more difficult month, with record low hydro generation for September.
MSCI Index changes on a knife-edge for CEN
MSCI Index changes will be set based on prices in the last two weeks of October. At this stage, we expect Mercury (MCY) will enter the MSCI Index. There is a good chance that CEN will also enter the Index, but that requires the number of constituent stock to increase (which we believe is a little more likely than not) and for CEN to not underperform Fletcher Building (FBU) in the coming weeks. All will be revealed on Friday 8 November.
Figure 1. Summary company valuation metric
<table class="table table-striped">
<tbody>
<tr>
<td>Ticker</td>
<td>Price</td>
<td>Target Price</td>
<td>Target Return</td>
<td>Rating</td>
<td>EV/ EBITDA(x)</td>
<td>FY20 Adj PE(x)</td>
<td>Gr Yld*</td>
<td>EBITDAF NZ$m</td>
</tr>
<tr>
<td>CEN</td>
<td>$8.72&nbsp;</td>
<td>$8.22&nbsp;</td>
<td>-1.3%</td>
<td>NEUTRAL</td>
<td>14.7</td>
<td>23.5</td>
<td>5.7%</td>
<td>488</td>
</tr>
<tr>
<td>GNE</td>
<td>$3.50&nbsp;</td>
<td>$3.28&nbsp;</td>
<td>-1.3%</td>
<td>NEUTRAL</td>
<td>15.9</td>
<td>33.4</td>
<td>6.9%</td>
<td>367</td>
</tr>
<tr>
<td>MCY</td>
<td>$5.40&nbsp;</td>
<td>$4.45&nbsp;</td>
<td>-14.7%</td>
<td>UNDERPERFORM</td>
<td>17.3</td>
<td>32.2</td>
<td>4.1%</td>
<td>488</td>
</tr>
<tr>
<td>MEL</td>
<td>$5.27&nbsp;</td>
<td>$4.20&nbsp;</td>
<td>-16.2%</td>
<td>UNDERPERFORM</td>
<td>19.4</td>
<td>30.5</td>
<td>5.1%</td>
<td>769</td>
</tr>
<tr>
<td>TLT</td>
<td>$2.84&nbsp;</td>
<td>$2.99&nbsp;</td>
<td>5.4%</td>
<td>OUTPERFORM</td>
<td>11.8</td>
<td>15.9</td>
<td>0.0%</td>
<td>145</td>
</tr>
<tr>
<td>TPW</td>
<td>$8.23&nbsp;</td>
<td>$8.00&nbsp;</td>
<td>1.4%</td>
<td>OUTPERFORM</td>
<td>15.0</td>
<td>24.5</td>
<td>5.6%</td>
<td>209</td>
</tr>
</tbody>
</table>
Source: Eikon, Forsyth Barr&nbsp; analysis, * Includes any forecast special dividend
<div class="content-highlight">
Investment View
We are positive on the long-term outlook for the sector. However, all of the electricity stocks are trading on record multiples, and any change in the interest rate environment is likely to impact on share prices. If interest rates stay low, we expect continued support for the sector.&nbsp;
</div>
Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185

Power Points
October 2019 — ASX Futures Prices Power On Up
It was another positive month for the electricity sector, with the Electricity Price Review (EPR) containing no big surprises, ASX futures prices firming to record levels and share prices once again outperforming the S&amp;P/NZX50. Wholesale electricity prices were again firm and rose noticeably after month end as hydro lakes continued to fall and a cold snap came over the country.
EPR outcomes lower regulatory risk, for now
The long-awaited EPR contained few surprises. As expected prompt payment discounts, win-backs and the low fixed charge tariffs are to be phased out. There is also expected to be stricter rules on futures market making. The Government is expecting the Electricity Authority (EA) to implement most of the recommendations and plans to review the implementation in two to three years.
Wholesale electricity prices firm as South Island hydro lakes fall
The average OTA price in September was $119/MWh, flat on the pcp, but since month end prices have been above $200/MWh, with hydro lake storage levels now 83% of average due to low South Island storage. The ASX futures prices have risen to record levels, with long-dated BEN prices above $90/MWh for the first time and OTA prices above $102/MWh. Electricity demand was again slightly up on the pcp (+1.2%, +0.8% excluding NZAS demand). We expect Meridian Energy (MEL) has had another good month; however, the outlook is less certain given the lower lake levels. Contact Energy (CEN) has had a more difficult month, with record low hydro generation for September.
MSCI Index changes on a knife-edge for CEN
MSCI Index changes will be set based on prices in the last two weeks of October. At this stage, we expect Mercury (MCY) will enter the MSCI Index. There is a good chance that CEN will also enter the Index, but that requires the number of constituent stock to increase (which we believe is a little more likely than not) and for CEN to not underperform Fletcher Building (FBU) in the coming weeks. All will be revealed on Friday 8 November.
Figure 1. Summary company valuation metric



Ticker
Price
Target Price
Target Return
Rating
EV/ EBITDA(x)
FY20 Adj PE(x)
Gr Yld*
EBITDAF NZ$m


CEN
$8.72&nbsp;
$8.22&nbsp;
-1.3%
NEUTRAL
14.7
23.5
5.7%
488


GNE
$3.50&nbsp;
$3.28&nbsp;
-1.3%
NEUTRAL
15.9
33.4
6.9%
367


MCY
$5.40&nbsp;
$4.45&nbsp;
-14.7%
UNDERPERFORM
17.3
32.2
4.1%
488


MEL
$5.27&nbsp;
$4.20&nbsp;
-16.2%
UNDERPERFORM
19.4
30.5
5.1%
769


TLT
$2.84&nbsp;
$2.99&nbsp;
5.4%
OUTPERFORM
11.8
15.9
0.0%
145


TPW
$8.23&nbsp;
$8.00&nbsp;
1.4%
OUTPERFORM
15.0
24.5
5.6%
209



Source: Eikon, Forsyth Barr&nbsp; analysis, * Includes any forecast special dividend

Investment View
We are positive on the long-term outlook for the sector. However, all of the electricity stocks are trading on record multiples, and any change in the interest rate environment is likely to impact on share prices. If interest rates stay low, we expect continued support for the sector.&nbsp;

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

Power Points: October 2019 — ASX Futures Prices Power On Up

<h2>Power Points</h2>
September 2019—Powering Higher
Interest rates collapsing to new lows and electricity share prices surging to new highs were the main feature of August 2019. However, Trustpower (TPW) is proving to be a laggard and we believe offers the best value in the sector. In contrast, we believe Mercury (MCY) has gone too far, with its likely inclusion in the MSCI Index pushing it into the expensive category. We have downgraded MCY to UNDERPERFORM.
Falling interest rates turbocharges electricity share prices
Interest rates declined significantly in August 2019, with the 10-year swap rate falling -0.44% to a current figure of 1.19%. That resulted in most electricity share prices surging, led by MCY but closely followed by Contact Energy (CEN) and Meridian Energy (MEL), all of which have increased more than +17% since the end of July. In light of the further interest rate declines, we have reviewed our valuation metrics and lift all of the electricity target prices at least +1.5%, with TPW increasing the most, +6.7% to $8.00.
Wholesale electricity prices rise again
Electricity wholesale prices increased strongly at both OTA and BEN in August 2019. Prices at OTA averaged $135/MWh in August, up +17% on the prior month. National electricity demand increased +0.8% vs. the pcp, partially due to a colder August, but also the additional NZAS demand. Also impacting the wholesale electricity market was a -10% decline in hydro storage levels to 101% of average at month end, with CEN and Genesis Energy’s (GNE) South Island hydro storage well below average. ASX futures prices again drifted higher, with long-dated OTA ASX futures up +5% to $102/MWh.
Reporting season wrap-up — strong earnings
Whilst there were no earnings surprises from the four companies reporting FY19 results, it did confirm that FY19 was a record year as sector EBITDAF increased +7.4%. MEL led the way, lifting FY19 EBITDAF +26% to $838m. Dividend growth for the sector was again solid, with MEL’s stand-out result and CEN’s new dividend policy (following its de-leveraging) increasing the shareholder returns. We are not expecting FY20 to be as strong as FY19, with normalised hydrology and CEN’s and MCY’s asset sales reducing sector EBITDAF -5.0% — although that will still represent solid growth on FY18 with the elevated wholesale electricity prices filtering through to consumer segments.
Figure 1. Summary company valuation metric
<table class="table table-striped">
<thead>
<tr>
<td>
&nbsp;
</td>
<td></td>
<td>
Target
</td>
<td>
Target
</td>
<td></td>
<td>
EV/
</td>
<td colspan="3">
FY20
</td>
<td>
EBITDAF
</td>
</tr>
<tr>
<td>
Ticker
</td>
<td>
Price
</td>
<td>
Price
</td>
<td>
Return
</td>
<td>
Rating
</td>
<td colspan="2">
EBITDA(x)
</td>
<td>
Adj PE (x)
</td>
<td>
Gr Yld *
</td>
<td>
NZ$m
</td>
</tr>
</thead>
<tbody>
<tr>
<td>
CEN
</td>
<td>
$8.92
</td>
<td>
$8.22
</td>
<td>
-3.4%
</td>
<td>
NEUTRAL
</td>
<td colspan="2">
15.0
</td>
<td>
24.1
</td>
<td>
5.6%
</td>
<td>
488
</td>
</tr>
<tr>
<td>
GNE
</td>
<td>
$3.65
</td>
<td>
$3.28
</td>
<td>
-5.3%
</td>
<td>
NEUTRAL
</td>
<td colspan="2">
16.5
</td>
<td>
34.9
</td>
<td>
6.6%
</td>
<td>
367
</td>
</tr>
<tr>
<td>
MCY
</td>
<td>
$5.47
</td>
<td>
$4.45
</td>
<td>
-15.7%
</td>
<td>
UNDERPERFORM
</td>
<td colspan="2">
17.5
</td>
<td>
32.6
</td>
<td>
4.0%
</td>
<td>
488
</td>
</tr>
<tr>
<td>
MEL
</td>
<td>
$5.54
</td>
<td>
$4.20
</td>
<td>
-20.3%
</td>
<td>
UNDERPERFORM
</td>
<td colspan="2">
20.3
</td>
<td>
32.1
</td>
<td>
4.8%
</td>
<td>
769
</td>
</tr>
<tr>
<td>
TLT
</td>
<td>
$2.75
</td>
<td>
$2.50
</td>
<td>
-9.1%
</td>
<td>
NEUTRAL
</td>
<td colspan="2">
11.4
</td>
<td>
15.3
</td>
<td>
0.0%
</td>
<td>
146
</td>
</tr>
<tr>
<td>
TPW
</td>
<td>
$7.83
</td>
<td>
$8.00
</td>
<td>
6.5%
</td>
<td>
OUTPERFORM
</td>
<td colspan="2">
14.4
</td>
<td>
23.3
</td>
<td>
5.9%
</td>
<td>
209
</td>
</tr>
<tr>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
</tbody>
</table>
Source: Eikon, Forsyth Barr analysis, * Includes any forecast special dividend
<div class="content-highlight">
Investment View
We are positive on the long-term outlook for the sector. Whilst all of the electricity stocks are trading on record multiples, the low interest rate environment and weight of money looking for new high-yielding investments is likely to be supportive near-term.
</div>
Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185
&nbsp;Adam Lourie
adam.lourie@forsythbarr.co.nz
+64 4 914 2273

Power Points
September 2019—Powering Higher
Interest rates collapsing to new lows and electricity share prices surging to new highs were the main feature of August 2019. However, Trustpower (TPW) is proving to be a laggard and we believe offers the best value in the sector. In contrast, we believe Mercury (MCY) has gone too far, with its likely inclusion in the MSCI Index pushing it into the expensive category. We have downgraded MCY to UNDERPERFORM.
Falling interest rates turbocharges electricity share prices
Interest rates declined significantly in August 2019, with the 10-year swap rate falling -0.44% to a current figure of 1.19%. That resulted in most electricity share prices surging, led by MCY but closely followed by Contact Energy (CEN) and Meridian Energy (MEL), all of which have increased more than +17% since the end of July. In light of the further interest rate declines, we have reviewed our valuation metrics and lift all of the electricity target prices at least +1.5%, with TPW increasing the most, +6.7% to $8.00.
Wholesale electricity prices rise again
Electricity wholesale prices increased strongly at both OTA and BEN in August 2019. Prices at OTA averaged $135/MWh in August, up +17% on the prior month. National electricity demand increased +0.8% vs. the pcp, partially due to a colder August, but also the additional NZAS demand. Also impacting the wholesale electricity market was a -10% decline in hydro storage levels to 101% of average at month end, with CEN and Genesis Energy’s (GNE) South Island hydro storage well below average. ASX futures prices again drifted higher, with long-dated OTA ASX futures up +5% to $102/MWh.
Reporting season wrap-up — strong earnings
Whilst there were no earnings surprises from the four companies reporting FY19 results, it did confirm that FY19 was a record year as sector EBITDAF increased +7.4%. MEL led the way, lifting FY19 EBITDAF +26% to $838m. Dividend growth for the sector was again solid, with MEL’s stand-out result and CEN’s new dividend policy (following its de-leveraging) increasing the shareholder returns. We are not expecting FY20 to be as strong as FY19, with normalised hydrology and CEN’s and MCY’s asset sales reducing sector EBITDAF -5.0% — although that will still represent solid growth on FY18 with the elevated wholesale electricity prices filtering through to consumer segments.
Figure 1. Summary company valuation metric




&nbsp;



Target


Target



EV/


FY20


EBITDAF




Ticker


Price


Price


Return


Rating


EBITDA(x)


Adj PE (x)


Gr Yld *


NZ$m






CEN


$8.92


$8.22


-3.4%


NEUTRAL


15.0


24.1


5.6%


488




GNE


$3.65


$3.28


-5.3%


NEUTRAL


16.5


34.9


6.6%


367




MCY


$5.47


$4.45


-15.7%


UNDERPERFORM


17.5


32.6


4.0%


488




MEL


$5.54


$4.20


-20.3%


UNDERPERFORM


20.3


32.1


4.8%


769




TLT


$2.75


$2.50


-9.1%


NEUTRAL


11.4


15.3


0.0%


146




TPW


$7.83


$8.00


6.5%


OUTPERFORM


14.4


23.3


5.9%


209
















Source: Eikon, Forsyth Barr analysis, * Includes any forecast special dividend

Investment View
We are positive on the long-term outlook for the sector. Whilst all of the electricity stocks are trading on record multiples, the low interest rate environment and weight of money looking for new high-yielding investments is likely to be supportive near-term.

Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185
&nbsp;Adam Lourie
adam.lourie@forsythbarr.co.nz
+64 4 914 2273

Power Points September 2019—Powering Higher

New Zealand

Contact Energy Limited is a diversified and integrated energy company which focuses on the generation of electricity and the sale of electricity and gas in New Zealand.

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52-week Range	0.00 - 0.00
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Contact Energy (CEN NZ)

Power Points: October 2019 — ASX Futures Prices Power On Up

Power Points October 2019 — ASX Futures Prices Power On Up It was another positive month for the electricity sector, with the Electricity Price...

Forsyth Barr

Power Points September 2019—Powering Higher

Power Points September 2019—Powering Higher Interest rates collapsing to new lows and electricity share prices surging to new highs were the main...

Forsyth Barr

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