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>Electricity Sector<br>Crunching the Clean Energy ETF Numbers</h2>
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<p>We&nbsp;estimate the required ETF selling in Contact Energy (CEN) and Meridian Energy (MEL) is 72m shares (9.3% of free float) and 100m shares (7.9% of free float) respectively due to S&amp;P's proposed changes to its Global Clean Energy Index (GCE Index) rules. The&nbsp;iShares&nbsp;ETFs&nbsp;tracking the GCE Index will have to sell ~84% of their current holdings. It is difficult to ascertain how prepared the market is for the CEN and MEL GCE Index weighting change, but on balance, there is likely to be more selling pressure on both names in the short-term. Our CEN rating is OUTPERFORM as we see good value at the current share price. In contrast our MEL rating is UNDERPERFORM as its valuation metrics are stretched, although they could improve further.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/196/107/original/blobid1.png?1616370899" class="editor-image img-responsive" data-smartkarma-image-id="196107"></figure>
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<h3>Trading volumes will dictate future weightings</h3>
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<p>We calculate that CEN will be 0.66% of the revised GCE Index and MEL 0.74%. Under S&amp;P's proposed GCE Index rules, this is the maximum weighting CEN and MEL can have due their relatively low liquidity. On a free float market cap&nbsp;basis (exposure score adjusted), MEL and CEN rank 15th and 20th&nbsp;respectively, but their liquidity ranking is 53rd and 56th out of 67 stocks.</p>
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<h3>Increased confidence in estimate following S&amp;P release of likely GCE Index constituents</h3>
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<div id="m_6065505454863228733ikqui">
<p>Friday, 19 March is the date S&amp;P will use to calculate the rebalance and was also the closing date for submissions on its most recent rule change proposals. S&amp;P has provided a list of GCE Index constituents under the proposed 4 March rules assuming those rules were in place during the October 2020 rebalance. Our estimated CEN and MEL weighting changes are based on market data as of 19 March, assume S&amp;P's 4 March proposed rule changes will be implemented and assume GCE Index constituents will be the same as the October 2020 list. Factors that could impact on the weighting change calculation&nbsp; include:</p>
<ol>
<li>Additional companies meeting the criteria over the past six months, lifting the constituent count above 67 and further diluting CEN/MEL weightings</li>
<li>Additional ETF&nbsp;buying over the coming month (selling is also possible, but GCE Index ETF flows have generally been positive)&nbsp;</li>
<li>S&amp;P adopting different rules to that proposed on 4 March</li>
</ol>
<p>Possible differences to our calculations are biased towards more selling being required (due to additional constituents and ETF buying), but we would be surprised if the selling required was materially greater than&nbsp;the amount indicated.</p>
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<h3>Key dates from here</h3>
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<div id="m_6065505454863228733iq682">
<p>S&amp;P's latest consultation document indicates it will inform clients of GCE Index changes on Friday, 2 April. The close of market Friday, 16 April remains the date when GCE Index changes will take effect — i.e. when GCE Index ETFs will have to sell CEN and MEL.</p>
</div>
<div>
<div>
<div><strong>Andrew Harvey-Green</strong></div>
<div><a href="mailto:andrew.harvey-green@forsythbarr.co.nz" target="_blank" rel="noopener">andrew.harvey-green@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 8185</div>
<div></div>
</div>
</div>
<div>
<div>
<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
</div>
</div>

Electricity Sector Crunching the Clean Energy ETF Numbers


We&nbsp;estimate the required ETF selling in Contact Energy (CEN) and Meridian Energy (MEL) is 72m shares (9.3% of free float) and 100m shares (7.9% of free float) respectively due to S&amp;P's proposed changes to its Global Clean Energy Index (GCE Index) rules. The&nbsp;iShares&nbsp;ETFs&nbsp;tracking the GCE Index will have to sell ~84% of their current holdings. It is difficult to ascertain how prepared the market is for the CEN and MEL GCE Index weighting change, but on balance, there is likely to be more selling pressure on both names in the short-term. Our CEN rating is OUTPERFORM as we see good value at the current share price. In contrast our MEL rating is UNDERPERFORM as its valuation metrics are stretched, although they could improve further.



Trading volumes will dictate future weightings


We calculate that CEN will be 0.66% of the revised GCE Index and MEL 0.74%. Under S&amp;P's proposed GCE Index rules, this is the maximum weighting CEN and MEL can have due their relatively low liquidity. On a free float market cap&nbsp;basis (exposure score adjusted), MEL and CEN rank 15th and 20th&nbsp;respectively, but their liquidity ranking is 53rd and 56th out of 67 stocks.


Increased confidence in estimate following S&amp;P release of likely GCE Index constituents


Friday, 19 March is the date S&amp;P will use to calculate the rebalance and was also the closing date for submissions on its most recent rule change proposals. S&amp;P has provided a list of GCE Index constituents under the proposed 4 March rules assuming those rules were in place during the October 2020 rebalance. Our estimated CEN and MEL weighting changes are based on market data as of 19 March, assume S&amp;P's 4 March proposed rule changes will be implemented and assume GCE Index constituents will be the same as the October 2020 list. Factors that could impact on the weighting change calculation&nbsp; include:

Additional companies meeting the criteria over the past six months, lifting the constituent count above 67 and further diluting CEN/MEL weightings
Additional ETF&nbsp;buying over the coming month (selling is also possible, but GCE Index ETF flows have generally been positive)&nbsp;
S&amp;P adopting different rules to that proposed on 4 March

Possible differences to our calculations are biased towards more selling being required (due to additional constituents and ETF buying), but we would be surprised if the selling required was materially greater than&nbsp;the amount indicated.


Key dates from here


S&amp;P's latest consultation document indicates it will inform clients of GCE Index changes on Friday, 2 April. The close of market Friday, 16 April remains the date when GCE Index changes will take effect — i.e. when GCE Index ETFs will have to sell CEN and MEL.



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





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Electricity Sector: Crunching the Clean Energy ETF Numbers

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

<p>Earlier today, S&amp;P Dow Jones announced that all the proposals of the latest market consultation would be implemented at the close of trading on 16 April to reduce constituent concentration, ease liquidity limitations, and improve index replication further than would have been achieved from the result of the prior market consultation.</p><p>We expect there will be 37 additions to the index taking the number of index constituents up to 67. This number will increase over the next few rebalances as the target is to get up to at least 100 constituent stocks.</p><p>With index weight dependent on free float market cap and turnover, plus capping of index weight dependent on exposure scores, this is going to be a large rebalance. We expect a one-way turnover of 48.1% with our expected changes.</p><p>Stocks that could see passive buying (sorted in terms of days of ADV) are <a href="https://www.smartkarma.com/entities/drax-group-plc" target="_blank" data-smartkarma-citation="entities:21911:1" rel="noopener">Drax Group PLC (DRX LN)</a>, <a href="https://www.smartkarma.com/entities/enel-americas-sa-c3a67f8a-ad13-45ff-a676-cbc513b8c458" target="_blank" data-smartkarma-citation="entities:25965:1" rel="noopener">Enel Americas Sa (ENIA US)</a>, <a href="https://www.smartkarma.com/entities/fortum-oyj" target="_blank" data-smartkarma-citation="entities:21762:1" rel="noopener">Fortum OYJ (FUM1V FH)</a>, <a href="https://www.smartkarma.com/entities/erg-spa" target="_blank" data-smartkarma-citation="entities:21186:1" rel="noopener">ERG SpA (ERG IM)</a>, <a href="https://www.smartkarma.com/entities/terna-rete-elettrica-nazionale" target="_blank" data-smartkarma-citation="entities:21232:1" rel="noopener">Terna Rete Elettrica Nazionale (TRN IM)</a>, <a href="https://www.smartkarma.com/entities/china-longyuan-power-group-corp-ltd" target="_blank" data-smartkarma-citation="entities:14215:1" rel="noopener">China Longyuan Power Group Corp (916 HK)</a>, <a href="https://www.smartkarma.com/entities/nordex-se" target="_blank" data-smartkarma-citation="entities:21682:1" rel="noopener">Nordex SE (NDX1 GR)</a>, <a href="https://www.smartkarma.com/entities/acciona-sa" target="_blank" data-smartkarma-citation="entities:21248:1" rel="noopener">Acciona SA (ANA SM)</a>, <a href="https://www.smartkarma.com/entities/avista-corp" target="_blank" data-smartkarma-citation="entities:17178:1" rel="noopener">Avista Corp (AVA US)</a> and <a href="https://www.smartkarma.com/entities/idacorp-inc" target="_blank" data-smartkarma-citation="entities:15190:1" rel="noopener">Idacorp Inc (IDA US)</a>.</p><p>Stocks that could see passive selling (sorted in terms of days of ADV) are <a href="https://www.smartkarma.com/entities/meridian-ener-partly-paid-sh" target="_blank" data-smartkarma-citation="entities:4327:1" rel="noopener">Meridian Energy (MEL NZ)</a>, <a href="https://www.smartkarma.com/entities/contact-energy-ltd" target="_blank" data-smartkarma-citation="entities:13136:1" rel="noopener">Contact Energy (CEN NZ)</a>, <a href="https://www.smartkarma.com/entities/verbund-ag" target="_blank" data-smartkarma-citation="entities:22563:1" rel="noopener">Verbund AG (VER AV)</a>, <a href="https://www.smartkarma.com/entities/edp-renovaveis-sa" target="_blank" data-smartkarma-citation="entities:21363:1" rel="noopener">EDP Renovaveis SA (EDPR PL)</a>, <a href="https://www.smartkarma.com/entities/scatec-solar-asa" target="_blank" data-smartkarma-citation="entities:25120:1" rel="noopener">Scatec Solar ASA (SSO NO)</a>, <a href="https://www.smartkarma.com/entities/innergex-renewable-energy-inc" target="_blank" data-smartkarma-citation="entities:25479:1" rel="noopener">Innergex Renewable Energy (INE CN)</a>, <a href="https://www.smartkarma.com/entities/boralex-inc" target="_blank" data-smartkarma-citation="entities:25478:1" rel="noopener">Boralex Inc (BLX CN)</a> and <a href="https://www.smartkarma.com/entities/siemens-gamesa-renewable-energy-s-a" target="_blank" data-smartkarma-citation="entities:21270:1" rel="noopener">Siemens Gamesa Renewable Energy, S.A. (SGRE SM)</a>.</p><p>Among existing constituents, there will be passive inflows on <a href="https://www.smartkarma.com/entities/orsted-a-s" target="_blank" data-smartkarma-citation="entities:24765:1" rel="noopener">Orsted A/S (ORSTED DC)</a>, <a href="https://www.smartkarma.com/entities/vestas-wind-systems-a-s" target="_blank" data-smartkarma-citation="entities:22524:1" rel="noopener">Vestas Wind Systems A/S (VWS DC)</a>, <a href="https://www.smartkarma.com/entities/solaredge-technologies-inc" target="_blank" data-smartkarma-citation="entities:27981:1" rel="noopener">SolarEdge Technologies Inc (SEDG US)</a>, <a href="https://www.smartkarma.com/entities/sunrun-inc" target="_blank" data-smartkarma-citation="entities:19726:1" rel="noopener">Sunrun Inc (RUN US)</a> and <a href="https://www.smartkarma.com/entities/enphase-energy-inc" target="_blank" data-smartkarma-citation="entities:8872:1" rel="noopener">Enphase Energy (ENPH US)</a>. </p>

Earlier today, S&amp;P Dow Jones announced that all the proposals of the latest market consultation would be implemented at the close of trading on 16 April to reduce constituent concentration, ease liquidity limitations, and improve index replication further than would have been achieved from the result of the prior market consultation.We expect there will be 37 additions to the index taking the number of index constituents up to 67. This number will increase over the next few rebalances as the target is to get up to at least 100 constituent stocks.With index weight dependent on free float market cap and turnover, plus capping of index weight dependent on exposure scores, this is going to be a large rebalance. We expect a one-way turnover of 48.1% with our expected changes.Stocks that could see passive buying (sorted in terms of days of ADV) are Drax Group PLC (DRX LN), Enel Americas Sa (ENIA US), Fortum OYJ (FUM1V FH), ERG SpA (ERG IM), Terna Rete Elettrica Nazionale (TRN IM), China Longyuan Power Group Corp (916 HK), Nordex SE (NDX1 GR), Acciona SA (ANA SM), Avista Corp (AVA US) and Idacorp Inc (IDA US).Stocks that could see passive selling (sorted in terms of days of ADV) are Meridian Energy (MEL NZ), Contact Energy (CEN NZ), Verbund AG (VER AV), EDP Renovaveis SA (EDPR PL), Scatec Solar ASA (SSO NO), Innergex Renewable Energy (INE CN), Boralex Inc (BLX CN) and Siemens Gamesa Renewable Energy, S.A. (SGRE SM).Among existing constituents, there will be passive inflows on Orsted A/S (ORSTED DC), Vestas Wind Systems A/S (VWS DC), SolarEdge Technologies Inc (SEDG US), Sunrun Inc (RUN US) and Enphase Energy (ENPH US). 

Global Clean Energy Index: All Proposals to Be Implemented; 48% One-Way Turnover

<p>The S&amp;P Global Clean Energy Index is designed to measure the performance of 30 companies from around the world that are involved in clean energy-related businesses, comprising a diversified mix of clean energy production and clean energy equipment and technology companies.</p><p>There are two ETFs that are benchmarked to the index and these ETFs have seen massive inflows over the last year. This has caused liquidity issues in the underlying stocks and has led to S&amp;P having multiple market consultations to reduce constituent concentration, easy liquidity limitations and improve index replication.</p><p>The changes due to these market consultations will cause large passive flows on the stocks. A few stocks have moved substantially over the last couple of months but there could be more in store for a few of them.</p><p>Depending on the which proposals are implemented, one-way turnover for the review could be in the range of 30-50% and there are a lot of stocks that will have more than 10 days of ADV to trade.</p><p>In this Insight we look at the index, the inflows on the ETFs, the various market consultations and the impact on the stocks that constitute the index and those that could be added to the index in the April rebalance.</p>

The S&amp;P Global Clean Energy Index is designed to measure the performance of 30 companies from around the world that are involved in clean energy-related businesses, comprising a diversified mix of clean energy production and clean energy equipment and technology companies.There are two ETFs that are benchmarked to the index and these ETFs have seen massive inflows over the last year. This has caused liquidity issues in the underlying stocks and has led to S&amp;P having multiple market consultations to reduce constituent concentration, easy liquidity limitations and improve index replication.The changes due to these market consultations will cause large passive flows on the stocks. A few stocks have moved substantially over the last couple of months but there could be more in store for a few of them.Depending on the which proposals are implemented, one-way turnover for the review could be in the range of 30-50% and there are a lot of stocks that will have more than 10 days of ADV to trade.In this Insight we look at the index, the inflows on the ETFs, the various market consultations and the impact on the stocks that constitute the index and those that could be added to the index in the April rebalance.

Global Clean Energy Index: MASSIVE Changes Coming Up; 30-50% One-Way Turnover

<h2>Electricity Sector<br>S&amp;P Clean Energy Index Consultation&nbsp;Threepeat</h2>
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<p>The upshot of S&amp;P's third go at changing its Global Clean Energy (GCE) Index rules, (despite seemingly finalising new rules mid-February), is a probable further reduction of the GCE Index weights of Contact Energy (CEN) and Meridian Energy (MEL).&nbsp; We estimate that under the proposed changes the&nbsp;ETFs&nbsp;that track the index will be required to sell between 72m–78m shares in CEN (~9% of free float) and between 100m–109m shares in MEL (~8% of free float). The exact amount will depend on the size and liquidity of new GCE Index constituents. The consultation doesn't mention a change to the US$3m six month MDVT (median daily traded value) entry threshold, meaning we expect Mercury (MCY) will still miss out on inclusion.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/192/712/original/image_81785932831615163313245.png?1615163315" class="editor-image img-responsive" data-smartkarma-image-id="192712"></figure>
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<h3>New proposals will increase the number of GCE Index constituents, diluting CEN and MEL further</h3>
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<p>The key proposed change impacting CEN and MEL is the increased target constituent count of 100, which will dilute MEL and CEN's weightings. To enable more constituents, S&amp;P is proposing to lower the "clean energy" requirement, allowing companies with a "significant clean energy exposure" to enter the GCE Index. Currently there are 30 GCE constituents. If S&amp;P applied the proposed rules at the October 2020 rebalance there would be 68 constituents, meaning as more companies meet the criteria the constituent count will increase towards 100 over time. A comparison of the current rules, the Feb-21 rule changes and the latest proposal are detailed in Figure 2.</p>
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<h3>Proposed rules increase the black box element of the GCE Index</h3>
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<p>It is harder to estimate the potential impact on CEN and MEL from the&nbsp;proposed rule changes, although there will extra ETF selling. It is unclear how S&amp;P assesses the "clean energy" aspect of constituents. With a lower clean energy threshold required to enter the GCE Index, it is possible some very large companies will now enter. Large, liquid companies entering the GCE Index will dilute CEN and&nbsp;MEL the most. The current largest constituent has a free float market cap of US$35b, whilst the median is US$3.5b of the 30 constituents&nbsp;(CEN is US$3.7b and MEL US$4.8b). In addition, liquidity plays a bigger role than it used to and with MEL (US$8.9m) and CEN (US$7.9m) MDVT liquidity well below the median of current constituents (US$36m), their respective GCE Index weightings are going to be much lower than in the past.</p>
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<h3>CEN offers great value, MEL still looks expensive</h3>
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<p>Whilst there is short-term downside risk to CEN, we see good value at current levels. It is trading on an FY21 gross dividend yield of 6.9% (which we expect to grow in coming years) and an FY22 EV/EBITDAF 11.9x. In comparison MEL's gross dividend yield is 4.2% and FY22 EV/EBITDAF 20.6x. Our CEN rating is OUTPERFORM and our MEL rating is UNDERPERFORM.</p>
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<div>
<div><strong>Andrew Harvey-Green</strong></div>
<div><a href="mailto:andrew.harvey-green@forsythbarr.co.nz" target="_blank" rel="noopener">andrew.harvey-green@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 8185</div>
<div></div>
</div>
</div>
<div>
<div>
<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
</div>
</div>

Electricity Sector S&amp;P Clean Energy Index Consultation&nbsp;Threepeat


The upshot of S&amp;P's third go at changing its Global Clean Energy (GCE) Index rules, (despite seemingly finalising new rules mid-February), is a probable further reduction of the GCE Index weights of Contact Energy (CEN) and Meridian Energy (MEL).&nbsp; We estimate that under the proposed changes the&nbsp;ETFs&nbsp;that track the index will be required to sell between 72m–78m shares in CEN (~9% of free float) and between 100m–109m shares in MEL (~8% of free float). The exact amount will depend on the size and liquidity of new GCE Index constituents. The consultation doesn't mention a change to the US$3m six month MDVT (median daily traded value) entry threshold, meaning we expect Mercury (MCY) will still miss out on inclusion.



New proposals will increase the number of GCE Index constituents, diluting CEN and MEL further


The key proposed change impacting CEN and MEL is the increased target constituent count of 100, which will dilute MEL and CEN's weightings. To enable more constituents, S&amp;P is proposing to lower the "clean energy" requirement, allowing companies with a "significant clean energy exposure" to enter the GCE Index. Currently there are 30 GCE constituents. If S&amp;P applied the proposed rules at the October 2020 rebalance there would be 68 constituents, meaning as more companies meet the criteria the constituent count will increase towards 100 over time. A comparison of the current rules, the Feb-21 rule changes and the latest proposal are detailed in Figure 2.


Proposed rules increase the black box element of the GCE Index


It is harder to estimate the potential impact on CEN and MEL from the&nbsp;proposed rule changes, although there will extra ETF selling. It is unclear how S&amp;P assesses the "clean energy" aspect of constituents. With a lower clean energy threshold required to enter the GCE Index, it is possible some very large companies will now enter. Large, liquid companies entering the GCE Index will dilute CEN and&nbsp;MEL the most. The current largest constituent has a free float market cap of US$35b, whilst the median is US$3.5b of the 30 constituents&nbsp;(CEN is US$3.7b and MEL US$4.8b). In addition, liquidity plays a bigger role than it used to and with MEL (US$8.9m) and CEN (US$7.9m) MDVT liquidity well below the median of current constituents (US$36m), their respective GCE Index weightings are going to be much lower than in the past.


CEN offers great value, MEL still looks expensive


Whilst there is short-term downside risk to CEN, we see good value at current levels. It is trading on an FY21 gross dividend yield of 6.9% (which we expect to grow in coming years) and an FY22 EV/EBITDAF 11.9x. In comparison MEL's gross dividend yield is 4.2% and FY22 EV/EBITDAF 20.6x. Our CEN rating is OUTPERFORM and our MEL rating is UNDERPERFORM.



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





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Electricity Sector: S&P Clean Energy Index Consultation Threepeat

<h2>Power Points<br>Drying Out — March 2021</h2>
<p>&nbsp;</p>
<p>Wholesale electricity market conditions are tight, with gas availability issues and well below average hydro storage lakes pushing the February 2021 average wholesale electricity price at Otahuhu to NZ$238/MWh, the third highest on record. As a result the earnings outlook for FY21 is more uncertain than usual, although Genesis Energy (GNE) is in the best position, with all of the other three large generator/retailers facing downside earnings risk if hydro conditions stay dry. The key take-out from the recent 1H21 results season is that we are moving from a "returning cash to shareholders" phase to a "building" phase requiring more capital. Contact Energy (CEN) and Meridian Energy (MEL) both announced new builds (as expected), had lower dividends and indicated the possibility of commencing a dividend reinvestment plan at the FY21 result.&nbsp;</p>
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<h3>February a sign of things to come</h3>
<p>February saw a sharp rise in wholesale electricity prices as a result of ongoing gas shortages and hydro storage volumes&nbsp;declining. Hydro storage levels of ~70% of average are roughly the same as in 2008 and 2012,&nbsp;the last significant dry years. With the market under stress, the wholesale electricity price at&nbsp;Otahuhu&nbsp;averaged&nbsp;NZ$238/MWh, close to&nbsp;levels last seen in the price spike of October 2018. Average daily electricity demand was -2.0% lower than the&nbsp;pcp. Of the large generator/retailers, GNE appears to be in the best position to&nbsp;benefit with it gradually making a third&nbsp;Rankine&nbsp;unit available. February&nbsp;Rankine&nbsp;generation was the highest monthly total since May 2013. Soft hydro generation for CEN and MEL point to a weak February performance.</p>
<h3>Solid 1H21 reporting season wrap</h3>
<p>The large generator/retailers reported a strong set of 1H21 results, with total sector EBITDAF up +6% on 1H20. The only laggard on the prior year was MEL which was cycling a record 1H20, whilst Mercury (MCY), GNE and CEN&nbsp;benefitted&nbsp;from rising retail prices. Despite the strong earnings, sector dividends were down on both the prior year, with MEL having ceased its "special" dividend and CEN resetting its dividend -10% lower. These dividend resets coincided with MEL and CEN&nbsp;confirming new generation builds and CEN raising NZ$400m of equity.</p>
<h3>Sector yields still look skinny despite share price falls</h3>
<p>Whilst the average sector gross dividend yield rose +70 basis points to 5.4%, due to share prices falling -11% on average, the yield increase matched the rise in&nbsp;long-term interest rates. As a result the spread between the 10-year swap rate and the average sector yield is unchanged at 3.5% and still well below the long-term average of ~5.0%. Therefore, if interest rates stabilise at current levels, we expect further short-term weakness in the electricity stocks.</p>
<p><strong>Andrew Harvey-Green</strong><br><a href="mailto:andrew.harvey-green@forsythbarr.co.nz" target="_blank" rel="noopener">andrew.harvey-green@<wbr>forsythbarr.co.nz</a> <br>+64 4 495 8185&nbsp;</p>
<p><strong>Scott Anderson</strong><br><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a> <br>+64 4 914 2219</p>

Power Points Drying Out — March 2021
&nbsp;
Wholesale electricity market conditions are tight, with gas availability issues and well below average hydro storage lakes pushing the February 2021 average wholesale electricity price at Otahuhu to NZ$238/MWh, the third highest on record. As a result the earnings outlook for FY21 is more uncertain than usual, although Genesis Energy (GNE) is in the best position, with all of the other three large generator/retailers facing downside earnings risk if hydro conditions stay dry. The key take-out from the recent 1H21 results season is that we are moving from a "returning cash to shareholders" phase to a "building" phase requiring more capital. Contact Energy (CEN) and Meridian Energy (MEL) both announced new builds (as expected), had lower dividends and indicated the possibility of commencing a dividend reinvestment plan at the FY21 result.&nbsp;

February a sign of things to come
February saw a sharp rise in wholesale electricity prices as a result of ongoing gas shortages and hydro storage volumes&nbsp;declining. Hydro storage levels of ~70% of average are roughly the same as in 2008 and 2012,&nbsp;the last significant dry years. With the market under stress, the wholesale electricity price at&nbsp;Otahuhu&nbsp;averaged&nbsp;NZ$238/MWh, close to&nbsp;levels last seen in the price spike of October 2018. Average daily electricity demand was -2.0% lower than the&nbsp;pcp. Of the large generator/retailers, GNE appears to be in the best position to&nbsp;benefit with it gradually making a third&nbsp;Rankine&nbsp;unit available. February&nbsp;Rankine&nbsp;generation was the highest monthly total since May 2013. Soft hydro generation for CEN and MEL point to a weak February performance.
Solid 1H21 reporting season wrap
The large generator/retailers reported a strong set of 1H21 results, with total sector EBITDAF up +6% on 1H20. The only laggard on the prior year was MEL which was cycling a record 1H20, whilst Mercury (MCY), GNE and CEN&nbsp;benefitted&nbsp;from rising retail prices. Despite the strong earnings, sector dividends were down on both the prior year, with MEL having ceased its "special" dividend and CEN resetting its dividend -10% lower. These dividend resets coincided with MEL and CEN&nbsp;confirming new generation builds and CEN raising NZ$400m of equity.
Sector yields still look skinny despite share price falls
Whilst the average sector gross dividend yield rose +70 basis points to 5.4%, due to share prices falling -11% on average, the yield increase matched the rise in&nbsp;long-term interest rates. As a result the spread between the 10-year swap rate and the average sector yield is unchanged at 3.5% and still well below the long-term average of ~5.0%. Therefore, if interest rates stabilise at current levels, we expect further short-term weakness in the electricity stocks.
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz  +64 4 495 8185&nbsp;
Scott Anderson scott.anderson@forsythbarr.co.nz  +64 4 914 2219

New Zealand

Meridian Energy Ltd. operates as a state-owned electricity generator. The Company produces hydro-electric power and supplies electricity to residential, business, and rural customers. Meridian Energy provides services throughout New Zealand.

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Meridian Energy (MEL NZ)

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