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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Contact Energy<br>Hydro Power Masks Cost Pressures—1H22</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Contact Energy (CEN) delivered the expected record hydro-powered 1H22 result, with both EBITDAF of NZ$322m and hydro generation of 2,391GWh a 1H record. Also aiding the 1H22 result were lower operating costs, although that hid increasing cost pressures and 2H22 operating cost guidance implicitly increased ~+4%, with extra opex increases likely in later years. Increasing opex pressure is the main driver of our lower earnings forecasts (~-1% over the next three years), and the -10cps (-1.3%) reduction in our target price to NZ$7.90. We retain our NEUTRAL rating.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings:</strong>&nbsp;FY22/FY23/FY24 EBITDAF -NZ$5/-NZ$5m/-NZ$7m (-0.8%/-1.0%/-1.2%) to NZ$581m/NZ$532m/NZ$576m</li>
<li><strong>Target price:</strong>&nbsp;Reduced -10cps to NZ$7.90</li>
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<h3>Record hydro-powered 1H22 result in line with expectations</h3>
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<p>1H22 hydro generation was +20% (+401GWh) higher than average and was the main factor behind CEN's record 1H22 EBITDA result of NZ$322m, up +NZ$55m (+21%) more than CEN's normalised hydro EBITDAF. High hydro generation allows CEN to swap out high cost thermal generation lowering generation costs. One-off gains (in particular an NZ$7m holiday pay provision release) also aided the strong performance. Normalised NPAT of NZ$125m was a +66% increase on 1H21 and also a 1H record. However, with CEN maintaining its dividend policy, the interim dividend of 14cps (71%, 10cps imputed) was flat on 1H21 (as expected).&nbsp;</p>
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<h3>Cost pressures rising, impacts future forecasts</h3>
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<p>Amongst&nbsp;CEN's&nbsp;guidance changes was an implicit +4% increase in 2H22&nbsp;opex&nbsp;from NZ$105m to NZ$109m. Whilst costs were well controlled in 1H22&nbsp;there are signs of increasing cost pressures, with insurance and staffing costs the main areas of concern. Whilst CEN is able to pass on some expected cost increases (network costs, gas price increases) and has some protection from inflation-linked power purchase agreements, the cost pressures are the main driver for our modest earnings downgrades. Our revised FY23 EBITDAF forecast of NZ$532m is +NZ$12m greater than&nbsp;CEN's&nbsp;normalised&nbsp;hydro FY22 EBITDAF of NZ$520m, with rising commercial and industrial prices the main factor.</p>
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<h3>January 2022 operating performance softer than seen in recent months</h3>
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<p>The importance of hydro generation was underlined by&nbsp;CEN's&nbsp;January 2022 operating performance, which was down -NZ$6m on January 2021 to NZ$33m. Very low hydro inflows resulted in hydro generation volumes -12% lower than the prior year.</p>
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Contact Energy Hydro Power Masks Cost Pressures—1H22

NEUTRAL
Contact Energy (CEN) delivered the expected record hydro-powered 1H22 result, with both EBITDAF of NZ$322m and hydro generation of 2,391GWh a 1H record. Also aiding the 1H22 result were lower operating costs, although that hid increasing cost pressures and 2H22 operating cost guidance implicitly increased ~+4%, with extra opex increases likely in later years. Increasing opex pressure is the main driver of our lower earnings forecasts (~-1% over the next three years), and the -10cps (-1.3%) reduction in our target price to NZ$7.90. We retain our NEUTRAL rating.


What's changed?&nbsp;



Earnings:&nbsp;FY22/FY23/FY24 EBITDAF -NZ$5/-NZ$5m/-NZ$7m (-0.8%/-1.0%/-1.2%) to NZ$581m/NZ$532m/NZ$576m
Target price:&nbsp;Reduced -10cps to NZ$7.90



Record hydro-powered 1H22 result in line with expectations


1H22 hydro generation was +20% (+401GWh) higher than average and was the main factor behind CEN's record 1H22 EBITDA result of NZ$322m, up +NZ$55m (+21%) more than CEN's normalised hydro EBITDAF. High hydro generation allows CEN to swap out high cost thermal generation lowering generation costs. One-off gains (in particular an NZ$7m holiday pay provision release) also aided the strong performance. Normalised NPAT of NZ$125m was a +66% increase on 1H21 and also a 1H record. However, with CEN maintaining its dividend policy, the interim dividend of 14cps (71%, 10cps imputed) was flat on 1H21 (as expected).&nbsp;


Cost pressures rising, impacts future forecasts


Amongst&nbsp;CEN's&nbsp;guidance changes was an implicit +4% increase in 2H22&nbsp;opex&nbsp;from NZ$105m to NZ$109m. Whilst costs were well controlled in 1H22&nbsp;there are signs of increasing cost pressures, with insurance and staffing costs the main areas of concern. Whilst CEN is able to pass on some expected cost increases (network costs, gas price increases) and has some protection from inflation-linked power purchase agreements, the cost pressures are the main driver for our modest earnings downgrades. Our revised FY23 EBITDAF forecast of NZ$532m is +NZ$12m greater than&nbsp;CEN's&nbsp;normalised&nbsp;hydro FY22 EBITDAF of NZ$520m, with rising commercial and industrial prices the main factor.


January 2022 operating performance softer than seen in recent months


The importance of hydro generation was underlined by&nbsp;CEN's&nbsp;January 2022 operating performance, which was down -NZ$6m on January 2021 to NZ$33m. Very low hydro inflows resulted in hydro generation volumes -12% lower than the prior year.


Contact Energy: Hydro Power Masks Cost Pressures—1H22