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<br>Renewables&nbsp;Powering Strong Start to FY22</h2>
<div></div>
<p><strong>NEUTRAL</strong></p>
<p>Contact Energy (CEN) posted another strong operating performance for October 2021, with high strong hydro generation the key feature. We believe CEN is on track for a record 1H result but note that a repeat of 2H21 is unlikely and our FY22 forecasts are largely unchanged. However, due to the recent step up in interest rates we have trimmed our target price -3.0% (-25cps) to NZ$8.05 as we target lower earnings multiples and a higher dividend yield. This target price adjustment is consistent with recent adjustments we have made to the other generator/retailers over the past four weeks. With interest rate headwinds and elevated regulatory risks expected to continue, our rating remains NEUTRAL.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/241/904/original/image_79193921831637024954566.png?1637024954" class="editor-image img-responsive" data-smartkarma-image-id="241904"></figure>
<div>
<h3>What's changed?&nbsp;</h3>
</div>
<div id="m_-4439190083832510989iwrmo3">
<ul>
<li><strong>Earnings</strong>:&nbsp;Minor positive forecast changes. FY22 EBITDAF increased +NZ$3m (+0.5%) to NZ$562m</li>
<li><strong>Target price</strong>:&nbsp;Reduced -25c (-3.0%) to NZ$8.05 from NZ$8.30</li>
</ul>
</div>
<div>
<h3>Second strongest October on record as hydro and geothermal generation power&nbsp;CEN's&nbsp;October 2021 performance</h3>
</div>
<div id="m_-4439190083832510989i60ph">
<p>CEN bounced back from a softer September 2021 to post a very strong estimated October 2021 EBITDAF of NZ$46m, +NZ$9m up on October 2020. The EBITDAF print is the second best on record, behind only October 2018 when CEN was able to take advantage of the unusual wholesale electricity market conditions following the&nbsp;Pohokura&nbsp;gas outage. The main driver of the strong performance vs. October 2020 was a big lift in hydro (+16%)&nbsp;and geothermal (+23%) generation volumes. The month's result continues&nbsp;CEN's&nbsp;strong start to FY22 and we calculate its rolling 12-month EBITDAF is closing in on NZ$600m for the first time, at NZ$596m.</p>
</div>
<div>
<h3>Heading for a record 1H but minor forecast changes</h3>
</div>
<div id="m_-4439190083832510989i5xlh">
<p>Earnings momentum continues to be with CEN and we expect November 2021 to be another good month vs. last year given CEN’s hydro storage volumes started the month above average and November 2020 geothermal was affected by the Te&nbsp;Mihi&nbsp;outage. Our forecast indicates CEN is on track to report a record 1H EBITDAF result, above NZ$300m for the first time, with record 1H hydro generation the main factor. However, assuming normalised hydro conditions in 2H, we do not expect CEN to be able to repeat the record 2H21 result and we remain comfortable with our current forecasts.</p>
</div>
<div>
<h3>ThermalCo&nbsp;thought piece designed to promote discussion</h3>
</div>
<div id="m_-4439190083832510989ijh3w">
<p>CEN has followed up earlier musings&nbsp;with a report looking at how&nbsp;ThermalCo&nbsp;(a business that would own and operate all thermal generation related assets in New Zealand) stacks up against alternative market structures designed to minimise market volatility as&nbsp;thermal generation is phased out in New Zealand. Whilst we think the idea has merit, it faces two significant hurdles. 1) regulatory approval of a monopoly thermal generation business and 2) to date&nbsp;Genesis Energy (GNE) has shown no interest in the idea.</p>
</div>

Contact Energy Renewables&nbsp;Powering Strong Start to FY22

NEUTRAL
Contact Energy (CEN) posted another strong operating performance for October 2021, with high strong hydro generation the key feature. We believe CEN is on track for a record 1H result but note that a repeat of 2H21 is unlikely and our FY22 forecasts are largely unchanged. However, due to the recent step up in interest rates we have trimmed our target price -3.0% (-25cps) to NZ$8.05 as we target lower earnings multiples and a higher dividend yield. This target price adjustment is consistent with recent adjustments we have made to the other generator/retailers over the past four weeks. With interest rate headwinds and elevated regulatory risks expected to continue, our rating remains NEUTRAL.


What's changed?&nbsp;



Earnings:&nbsp;Minor positive forecast changes. FY22 EBITDAF increased +NZ$3m (+0.5%) to NZ$562m
Target price:&nbsp;Reduced -25c (-3.0%) to NZ$8.05 from NZ$8.30



Second strongest October on record as hydro and geothermal generation power&nbsp;CEN's&nbsp;October 2021 performance


CEN bounced back from a softer September 2021 to post a very strong estimated October 2021 EBITDAF of NZ$46m, +NZ$9m up on October 2020. The EBITDAF print is the second best on record, behind only October 2018 when CEN was able to take advantage of the unusual wholesale electricity market conditions following the&nbsp;Pohokura&nbsp;gas outage. The main driver of the strong performance vs. October 2020 was a big lift in hydro (+16%)&nbsp;and geothermal (+23%) generation volumes. The month's result continues&nbsp;CEN's&nbsp;strong start to FY22 and we calculate its rolling 12-month EBITDAF is closing in on NZ$600m for the first time, at NZ$596m.


Heading for a record 1H but minor forecast changes


Earnings momentum continues to be with CEN and we expect November 2021 to be another good month vs. last year given CEN’s hydro storage volumes started the month above average and November 2020 geothermal was affected by the Te&nbsp;Mihi&nbsp;outage. Our forecast indicates CEN is on track to report a record 1H EBITDAF result, above NZ$300m for the first time, with record 1H hydro generation the main factor. However, assuming normalised hydro conditions in 2H, we do not expect CEN to be able to repeat the record 2H21 result and we remain comfortable with our current forecasts.


ThermalCo&nbsp;thought piece designed to promote discussion


CEN has followed up earlier musings&nbsp;with a report looking at how&nbsp;ThermalCo&nbsp;(a business that would own and operate all thermal generation related assets in New Zealand) stacks up against alternative market structures designed to minimise market volatility as&nbsp;thermal generation is phased out in New Zealand. Whilst we think the idea has merit, it faces two significant hurdles. 1) regulatory approval of a monopoly thermal generation business and 2) to date&nbsp;Genesis Energy (GNE) has shown no interest in the idea.


Contact Energy: Renewables Powering Strong Start to FY22