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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

EDP - Energias de Portugal SA / Event-Driven

<p>The changes to the S&amp;P Global Clean Energy Index have been announced. There are 52 additions to the index to take the number of index constituents up to 82. The changes are effective after the close of trading on 16 April.</p><p>The 52 additions and capping changes will result in a one-way turnover of close to 55% and will require the ETFs tracking the index to trade US$12bn to rebalance their portfolios.</p><p>The largest buying impact in terms of ADV to trade will be on <a href="https://www.smartkarma.com/entities/edp-energias-de-portugal-sa" target="_blank" data-smartkarma-citation="entities:21362:1" rel="noopener">Edp - Energias De Portugal Sa (EDP PL)</a>, <a href="https://www.smartkarma.com/entities/sse-plc" target="_blank" data-smartkarma-citation="entities:22163:1" rel="noopener">SSE PLC (SSE LN)</a>, <a href="https://www.smartkarma.com/entities/northland-power-inc" target="_blank" data-smartkarma-citation="entities:25480:1" rel="noopener">Northland Power (NPI CN)</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/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/meyer-burger-technology-ag" target="_blank" data-smartkarma-citation="entities:25013:1" rel="noopener">Meyer Burger Technology Ag (MBTN SW)</a> and <a href="https://www.smartkarma.com/entities/centrais-eletricas-br-sp-adr" target="_blank" data-smartkarma-citation="entities:28638:1" rel="noopener">Centrais Eletricas Br-Sp Adr (EBR US)</a>.</p><p>The largest selling impact will be on <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/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/cia-energetica-de-spon-adr" target="_blank" data-smartkarma-citation="entities:28644:1" rel="noopener">Cia Energetica De-Spon Adr (CIG US)</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/scatec-solar-asa" target="_blank" data-smartkarma-citation="entities:25120:1" rel="noopener">Scatec Solar ASA (SSO NO)</a>.</p><p>Among the current index constituents, there will be buying 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> and <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>.</p><p>We recommend buying the surprise inclusions and unwinding the positions by implementation date. A lot of the stocks that will have a reduction in index weight have been sold off over the last few months and the active positions will be covered leading up to implementation date - we recommend buying these stocks in the days leading up to implementation date since the stocks could rally once the overhang of passive selling has been removed.</p>

The changes to the S&amp;P Global Clean Energy Index have been announced. There are 52 additions to the index to take the number of index constituents up to 82. The changes are effective after the close of trading on 16 April.The 52 additions and capping changes will result in a one-way turnover of close to 55% and will require the ETFs tracking the index to trade US$12bn to rebalance their portfolios.The largest buying impact in terms of ADV to trade will be on Edp - Energias De Portugal Sa (EDP PL), SSE PLC (SSE LN), Northland Power (NPI CN), Enel Americas SA (ENIA US), Drax Group PLC (DRX LN), Meyer Burger Technology Ag (MBTN SW) and Centrais Eletricas Br-Sp Adr (EBR US).The largest selling impact will be on Meridian Energy (MEL NZ), Contact Energy (CEN NZ), Verbund AG (VER AV), Innergex Renewable Energy (INE CN), Cia Energetica De-Spon Adr (CIG US), Boralex Inc (BLX CN) and Scatec Solar ASA (SSO NO).Among the current index constituents, there will be buying on Orsted A/S (ORSTED DC) and Vestas Wind Systems A/S (VWS DC).We recommend buying the surprise inclusions and unwinding the positions by implementation date. A lot of the stocks that will have a reduction in index weight have been sold off over the last few months and the active positions will be covered leading up to implementation date - we recommend buying these stocks in the days leading up to implementation date since the stocks could rally once the overhang of passive selling has been removed.

Global Clean Energy Index: 52 Adds, 55% Index Turnover, US$12bn to Trade

New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

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Equity Bottom-Up

<h2>Electricity Sector<br>Crunching the Clean Energy ETF Numbers</h2>
<p></p>
<div id="m_6065505454863228733iubdj">
<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>
</div>
<div>
<h3>Trading volumes will dictate future weightings</h3>
</div>
<div id="m_6065505454863228733ictj8">
<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>
</div>
<div>
<h3>Increased confidence in estimate following S&amp;P release of likely GCE Index constituents</h3>
</div>
<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>
</div>
<div>
<h3>Key dates from here</h3>
</div>
<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

<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>
<p></p>
<div id="m_-8766639270074383272iubdj">
<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>
</div>
<div>
<h3>New proposals will increase the number of GCE Index constituents, diluting CEN and MEL further</h3>
</div>
<div id="m_-8766639270074383272ikqui">
<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>
</div>
<div>
<h3>Proposed rules increase the black box element of the GCE Index</h3>
</div>
<div id="m_-8766639270074383272iix2v">
<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>
</div>
<div>
<h3>CEN offers great value, MEL still looks expensive</h3>
</div>
<div id="m_-8766639270074383272imk04">
<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>
</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 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

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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