New Zealand Professional Investment Services Firm

Forsyth Barr

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.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Contact Energy</h2>
Heavy Rain Evapora<a target="_blank"></a>tes
Contact Energy’s (CEN) December 2019 operating performance showed little sign of benefitting from the strong hydro inflows in November and December. December hydro generation was barely above average, the heavy rain seemingly evaporating. We have cut our FY20 EBITDAF forecast materially -$34m (-7.1%) to $444m and our target price is -30cps (-3.7%) lower to $7.85.
What’s changed?
<ul>
<li>Earnings: FY20 EBITDAF cut -$34m (-7.1%) to $444m</li>
<li>Target Price: Reduced -30cps (-3.7%) to $7.85</li>
<li>Rating: OUTPERFORM rating retained</li>
</ul>
Heavy November/December rains have not appeared in operating stats
December 2019 hydro generation volumes disappointed. At 345GWh, this is just +1% above average. Yet, CEN reported that December hydro inflows were 202% of average and lake levels on 10 December were 156% of average. 2Q20 inflows were ~155% of average vs. 88% in the pcp. Yet, 2Q20 hydro generation was -9% lower than the pcp. Whilst CEN spilt plenty of water and held back some for generation in January, hydro generation was lower than expected.
Retail sales volumes were steady, with mass market volumes up +2% and the retail netback up +0.8% vs. pcp. Commercial volumes continue recent declines (as CEN has yet to re-enter the market) and were down -24% vs. pcp.
1H20 result expected to be soft
We estimate that December 2019 EBITDAF was $34m, just +$2m more than the pcp. Our 1H20 EBITDAF forecast is $220m, -$57m lower than the pcp. CEN is reporting its 1H20 result on Monday 10 February.
Significant earnings cuts on lower renewable generation volumes
The material -$34m cut in our FY20 EBITDAF forecast is primarily (-$24m) due to renewable generation volumes dropping -275GWh, reversing the upgrade we made in December following the heavy rain. Other factors contributing to reduced earnings are no signs of increasing commercial prices (the commercial netback in December 2019 was the same as December 2017 — -$5m), commercial volumes a little lower than expected (-$3m), and higher corporate overhead costs (-$2m). These latter three factors also impact our longer-term forecasts, although that starts to reverse in FY22 as we assume CEN re-enters the commercial market.
The hit to near-term earnings has resulted in us lowering our target price -30cps to $7.85.
<div class="content-highlight">
Investment View
Our rating is OUTPERFORM. Notwithstanding another challenging year, we view CEN as offering some of the best value amongst the generator/retailers. We believe the NZAS closure risk is more than priced into the share price. CEN is offering an attractive dividend yield and has one of the best potential development projects (Tauhara) in the country.&nbsp;
</div>
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185

Contact Energy
Heavy Rain Evaporates
Contact Energy’s (CEN) December 2019 operating performance showed little sign of benefitting from the strong hydro inflows in November and December. December hydro generation was barely above average, the heavy rain seemingly evaporating. We have cut our FY20 EBITDAF forecast materially -$34m (-7.1%) to $444m and our target price is -30cps (-3.7%) lower to $7.85.
What’s changed?

Earnings: FY20 EBITDAF cut -$34m (-7.1%) to $444m
Target Price: Reduced -30cps (-3.7%) to $7.85
Rating: OUTPERFORM rating retained

Heavy November/December rains have not appeared in operating stats
December 2019 hydro generation volumes disappointed. At 345GWh, this is just +1% above average. Yet, CEN reported that December hydro inflows were 202% of average and lake levels on 10 December were 156% of average. 2Q20 inflows were ~155% of average vs. 88% in the pcp. Yet, 2Q20 hydro generation was -9% lower than the pcp. Whilst CEN spilt plenty of water and held back some for generation in January, hydro generation was lower than expected.
Retail sales volumes were steady, with mass market volumes up +2% and the retail netback up +0.8% vs. pcp. Commercial volumes continue recent declines (as CEN has yet to re-enter the market) and were down -24% vs. pcp.
1H20 result expected to be soft
We estimate that December 2019 EBITDAF was $34m, just +$2m more than the pcp. Our 1H20 EBITDAF forecast is $220m, -$57m lower than the pcp. CEN is reporting its 1H20 result on Monday 10 February.
Significant earnings cuts on lower renewable generation volumes
The material -$34m cut in our FY20 EBITDAF forecast is primarily (-$24m) due to renewable generation volumes dropping -275GWh, reversing the upgrade we made in December following the heavy rain. Other factors contributing to reduced earnings are no signs of increasing commercial prices (the commercial netback in December 2019 was the same as December 2017 — -$5m), commercial volumes a little lower than expected (-$3m), and higher corporate overhead costs (-$2m). These latter three factors also impact our longer-term forecasts, although that starts to reverse in FY22 as we assume CEN re-enters the commercial market.
The hit to near-term earnings has resulted in us lowering our target price -30cps to $7.85.

Investment View
Our rating is OUTPERFORM. Notwithstanding another challenging year, we view CEN as offering some of the best value amongst the generator/retailers. We believe the NZAS closure risk is more than priced into the share price. CEN is offering an attractive dividend yield and has one of the best potential development projects (Tauhara) in the country.&nbsp;

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

Contact Energy

Contact Energy: Heavy Rain Evaporates