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<br>Solar Still Shining Bright— June 2022</h2>
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<p>May 2022 saw recent trends continue&nbsp;—&nbsp;hydro storage declined (down -8pp to 73% of average), long-dated futures prices strengthened (up +6% to NZ$178/MWh) and more solar projects (another 1.2GW taking the pipeline to just under 5GW) were announced, but no development commitments made. High wholesale electricity prices and low regulatory risk is mutually exclusive, so the lack of new project commitments is of growing concern. Whilst it was a tough month for the generator/retailers on the market with only&nbsp;Manawa&nbsp;Energy’s (MNW) share price rising, the sector remains expensive and trading near the record low dividend to 10-year swap rate spread. Genesis Energy (GNE) and Contact Energy (CEN) are our preferred sector picks (NEUTRAL), with Mercury (MCY), Meridian Energy (MEL) and MNW UNDERPERFORM.</p>
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<h3>Futures prices continue upwards pressure, solar pipeline grows, but no new developments committed</h3>
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<p>Another month and another increase in futures prices. The 2023&nbsp;Otahuhu&nbsp;(OTA) is now above NZ$200/MWh&nbsp;with continuing rises in the cost of running thermal generation the main factor pushing futures prices to new records. At the same time, wholesale electricity prices keep rising, the solar pipeline keeps growing with Far North Solar indicating it has a 1.1GW pipeline, helping to take the total solar pipeline to almost 5GW. If all announced generation projects announced were built, it would add 17TWh to the market, a +40% on current generation. Whilst there are lots of pipeline announcements, there have been no substantial new projects committed since MEL’s&nbsp;Harapaki&nbsp;wind farm in February 2021. Whilst a rising interest rate environment and project inflation makes reaching financial close challenging, in our view the lack of new development commitments is a growing issue for the sector given where wholesale electricity prices are.</p>
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<h3>Wholesale electricity market steady through May as hydro lakes decline</h3>
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<p>The average May 2022 OTA wholesale price was NZ$223/MWh, a +13% increase on April 2022, but in the context of hydro storage falling a further -8pp to 73%, not a great surprise. That said, South Island hydro generation was +15% better than the prior month, albeit still below average. Non-NZAS electricity demand was -3.3% lower than May 2021 with refinery and Norske Skog closures still rolling through the numbers. Also impacting demand was a warm May 2022 and with NIWA forecasting a benign winter we expect continued soft electricity demand.</p>
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<h3>Emissions Reduction Program (ERP) a modest positive — signals more important than specific policy</h3>
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<p>The Government’s long-awaited response to the Climate Change Commission’s report was released in May 2022. Most of the policy announcements were in line with expectations. The biggest positive came from the announcement of a 50% renewable energy target as opposed to a repeat of the 100% renewable electricity target. It is a soft signal that gas-peaking generation may be tolerated for a few more years, helping to reduce sector uncertainty and enable the sector to play its role in decarbonising the economy.</p>
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Power Points Solar Still Shining Bright— June 2022


May 2022 saw recent trends continue&nbsp;—&nbsp;hydro storage declined (down -8pp to 73% of average), long-dated futures prices strengthened (up +6% to NZ$178/MWh) and more solar projects (another 1.2GW taking the pipeline to just under 5GW) were announced, but no development commitments made. High wholesale electricity prices and low regulatory risk is mutually exclusive, so the lack of new project commitments is of growing concern. Whilst it was a tough month for the generator/retailers on the market with only&nbsp;Manawa&nbsp;Energy’s (MNW) share price rising, the sector remains expensive and trading near the record low dividend to 10-year swap rate spread. Genesis Energy (GNE) and Contact Energy (CEN) are our preferred sector picks (NEUTRAL), with Mercury (MCY), Meridian Energy (MEL) and MNW UNDERPERFORM.



Futures prices continue upwards pressure, solar pipeline grows, but no new developments committed


Another month and another increase in futures prices. The 2023&nbsp;Otahuhu&nbsp;(OTA) is now above NZ$200/MWh&nbsp;with continuing rises in the cost of running thermal generation the main factor pushing futures prices to new records. At the same time, wholesale electricity prices keep rising, the solar pipeline keeps growing with Far North Solar indicating it has a 1.1GW pipeline, helping to take the total solar pipeline to almost 5GW. If all announced generation projects announced were built, it would add 17TWh to the market, a +40% on current generation. Whilst there are lots of pipeline announcements, there have been no substantial new projects committed since MEL’s&nbsp;Harapaki&nbsp;wind farm in February 2021. Whilst a rising interest rate environment and project inflation makes reaching financial close challenging, in our view the lack of new development commitments is a growing issue for the sector given where wholesale electricity prices are.


Wholesale electricity market steady through May as hydro lakes decline


The average May 2022 OTA wholesale price was NZ$223/MWh, a +13% increase on April 2022, but in the context of hydro storage falling a further -8pp to 73%, not a great surprise. That said, South Island hydro generation was +15% better than the prior month, albeit still below average. Non-NZAS electricity demand was -3.3% lower than May 2021 with refinery and Norske Skog closures still rolling through the numbers. Also impacting demand was a warm May 2022 and with NIWA forecasting a benign winter we expect continued soft electricity demand.


Emissions Reduction Program (ERP) a modest positive — signals more important than specific policy


The Government’s long-awaited response to the Climate Change Commission’s report was released in May 2022. Most of the policy announcements were in line with expectations. The biggest positive came from the announcement of a 50% renewable energy target as opposed to a repeat of the 100% renewable electricity target. It is a soft signal that gas-peaking generation may be tolerated for a few more years, helping to reduce sector uncertainty and enable the sector to play its role in decarbonising the economy.


Power Points: Solar Still Shining Bright— June 2022

<h2>Manawa Energy<br>Metamorphosis&nbsp;Complete — FY22 Result</h2>
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<p><strong>UNDERPERFORM</strong></p>
<p>Manawa's&nbsp;(MNW) metamorphosis into a stand-alone generator is complete now that it has reported its last result as a generator/retailer and the sale of its retail business has happened. FY22 EBITDAF of NZ$204m was up +NZ$4m on FY21, a solid result considering the challenging hydro conditions, although it was aided by NZ$11m of non-cash adjustments.&nbsp;MNW's&nbsp;future as an asset developer took another step, with MNW revealing a 120MW solar project near Coromandel. Notwithstanding a growing development pipeline and favourable wholesale electricity prices, MNW is the most expensive electricity stock in the NZ market, trading on the highest earnings multiples and lowest dividend yield. UNDERPERFORM.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY23/FY24/FY25 EBITDAF changed -NZ$4m/+NZ$3m/+NZ$1m to NZ$147m/NZ$145m/NZ$149m respectively</li>
<li><strong>Target price</strong>:&nbsp;Increased +10cps (+2.0%) to NZ$5.20</li>
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<h3>Last result as a generator/retailer solid in light of soft hydro generation, final dividend a modest disappointment</h3>
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<p>MNW's&nbsp;FY22 EBITDAF was split NZ$160m generation/NZ$44m retail, both divisions up +2% on FY21. FY22 was a year of transition, with MNW incurring NZ$7m of transaction related costs, offsetting NZ$11m of non-cash gains and hydro generation volumes +3% better than FY21 (but still -10% below normal).&nbsp;MNW's&nbsp;final dividend of 16cps was down -1cps on recent periods, a modest surprise. Looking forward, MNW reaffirmed FY23 EBITDAF guidance of NZ$140m to NZ$160m, but noted&nbsp;difficult generation conditions in the first six weeks. We trimmed our FY23 EBITDAF forecast -2.4% to NZ$147m reflecting the challenging hydro situation. Later year earnings increased modestly due to rising wholesale electricity prices, helping to lift our&nbsp;target price&nbsp;+10cps to NZ$5.20.</p>
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<h3>Development pipeline continues to grow with solar looking the most likely</h3>
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<p>MNW appears to be&nbsp;focussing&nbsp;on solar, announcing a new 120MW project close to beginning&nbsp;the consenting process. The near-term focus on solar is logical given its speed to market and MNW is well-placed with its hydro generation to provide solar-backed firmed&nbsp;offtake&nbsp;contracts. That said, MNW has yet to push go on any development and its initial spare balance sheet capacity of ~NZ$150m is sufficient to fund one ~120MW solar project itself. MNW will have to use its capital wisely to maximise its development potential.</p>
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<h3>Positive aspects but very expensive</h3>
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<p>Whilst&nbsp;MNW's&nbsp;development strategy makes sense and is appealing, MNW is expensive. We estimate underlying FY24 EBITDAF to be ~NZ$145m, which will support an 18cps dividend. The decline in near-term earnings and dividend means&nbsp;MNW's&nbsp;FY24 gross dividend yield is almost -2.0% lower than Meridian Energy's (MEL) at 3.6% and its EV/EBITDAF multiple is at a +15% premium. MEL is normally the most expensive electricity stock. MNW is a quality&nbsp;company,&nbsp; but it lacks size, liquidity and asset quality vs. MEL.</p>
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Manawa Energy Metamorphosis&nbsp;Complete — FY22 Result

UNDERPERFORM
Manawa's&nbsp;(MNW) metamorphosis into a stand-alone generator is complete now that it has reported its last result as a generator/retailer and the sale of its retail business has happened. FY22 EBITDAF of NZ$204m was up +NZ$4m on FY21, a solid result considering the challenging hydro conditions, although it was aided by NZ$11m of non-cash adjustments.&nbsp;MNW's&nbsp;future as an asset developer took another step, with MNW revealing a 120MW solar project near Coromandel. Notwithstanding a growing development pipeline and favourable wholesale electricity prices, MNW is the most expensive electricity stock in the NZ market, trading on the highest earnings multiples and lowest dividend yield. UNDERPERFORM.


What's changed?&nbsp;



Earnings:&nbsp;FY23/FY24/FY25 EBITDAF changed -NZ$4m/+NZ$3m/+NZ$1m to NZ$147m/NZ$145m/NZ$149m respectively
Target price:&nbsp;Increased +10cps (+2.0%) to NZ$5.20



Last result as a generator/retailer solid in light of soft hydro generation, final dividend a modest disappointment


MNW's&nbsp;FY22 EBITDAF was split NZ$160m generation/NZ$44m retail, both divisions up +2% on FY21. FY22 was a year of transition, with MNW incurring NZ$7m of transaction related costs, offsetting NZ$11m of non-cash gains and hydro generation volumes +3% better than FY21 (but still -10% below normal).&nbsp;MNW's&nbsp;final dividend of 16cps was down -1cps on recent periods, a modest surprise. Looking forward, MNW reaffirmed FY23 EBITDAF guidance of NZ$140m to NZ$160m, but noted&nbsp;difficult generation conditions in the first six weeks. We trimmed our FY23 EBITDAF forecast -2.4% to NZ$147m reflecting the challenging hydro situation. Later year earnings increased modestly due to rising wholesale electricity prices, helping to lift our&nbsp;target price&nbsp;+10cps to NZ$5.20.


Development pipeline continues to grow with solar looking the most likely


MNW appears to be&nbsp;focussing&nbsp;on solar, announcing a new 120MW project close to beginning&nbsp;the consenting process. The near-term focus on solar is logical given its speed to market and MNW is well-placed with its hydro generation to provide solar-backed firmed&nbsp;offtake&nbsp;contracts. That said, MNW has yet to push go on any development and its initial spare balance sheet capacity of ~NZ$150m is sufficient to fund one ~120MW solar project itself. MNW will have to use its capital wisely to maximise its development potential.


Positive aspects but very expensive


Whilst&nbsp;MNW's&nbsp;development strategy makes sense and is appealing, MNW is expensive. We estimate underlying FY24 EBITDAF to be ~NZ$145m, which will support an 18cps dividend. The decline in near-term earnings and dividend means&nbsp;MNW's&nbsp;FY24 gross dividend yield is almost -2.0% lower than Meridian Energy's (MEL) at 3.6% and its EV/EBITDAF multiple is at a +15% premium. MEL is normally the most expensive electricity stock. MNW is a quality&nbsp;company,&nbsp; but it lacks size, liquidity and asset quality vs. MEL.


Manawa Energy: Metamorphosis Complete — FY22 Result

New Zealand

Manawa Energy Limited is a renewable energy company. The Company generate powers through hydro power stations and wind farms throughout Australasia. Manawa Energy is also engaged in electricity distribution.

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Manawa Energy Ltd (MNW NZ)

Power Points: Solar Still Shining Bright— June 2022

Power PointsSolar Still Shining Bright— June 2022 May 2022 saw recent trends continue — hydro storage declined (down -8pp to 73% of average),...

Forsyth Barr

Manawa Energy: Metamorphosis Complete — FY22 Result

Manawa EnergyMetamorphosis Complete — FY22 Result UNDERPERFORM Manawa's (MNW) metamorphosis into a stand-alone generator is complete now that it...

Forsyth Barr

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