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>
When it Rains it Pours<a target="_blank"></a>
Following ASM commentary that it has been a difficult start to FY20 for Contact Energy (CEN), the heavens opened, to the point where CEN has more water than it can handle. In addition, its deal to accelerate the removal of lower South Island transmission constraints and finalised 2020–2024 transmission prices lower than expected means it has been a good month for CEN. We have upgraded our FY20 EBTDAF forecast +$12m to $478m, lifted our target price +12cps to $8.15 and reiterate our OUTPERFORM rating.
What’s changed?
<ul>
<li>Earnings: FY20/FY21 EBITDAF lifted +$12m/+$12m to $478m/$495m</li>
<li>Target Price: Increased +12cps to $8.15</li>
<li>Rating: OUTPERFORM rating retained</li>
</ul>
Clutha spilling water after deluge
In the space of four weeks, CEN’s hydro storage levels have gone from ~-100GWh (-39%) below average to +180GWh (+56%) above average. The only time CEN has had more water in its lakes was 20 years ago (almost exactly), and it is no surprise CEN is spilling water at present.
Deal to relieve lower South Island transmission constraints a positive
CEN and Meridian Energy have paid $5m each to Transpower in order for it to start work earlier than it otherwise would have on relieving lower South Island transmission constraints. Whilst the transmission lines will only constrain in the event the aluminium smelter (NZAS) closes, it is a significant positive as it materially reduces the amount of lost hydro generation if NZAS were to close. In addition, it improves CEN’s negotiating position with NZAS (and the North Island generators). We have lowered our NZAS risk adjustment 3cps to -9cps.
FY20 earnings uplift on more water, offset by Transpower payment
We have lifted our FY20 EBITDAF forecast +$12m (+2.7%) to $478m. The increase is largely due to the increase in hydro storage, offset by the -$5m payment to Transpower and the fact EBITDAF to the end of October was tracking worse than expected. Our FY21 EBITDAF forecast has also increased +$12m (+2.5%) to $495m, mainly due to lower transmission and distribution prices following the Commerce Commission’s recent regulatory decisions.
The earnings uplifts and lower NZAS risk adjustment increases our target price +12cps (+1.5%) to $8.15.&nbsp;
<div class="content-highlight">
Investment View
Our rating is OUTPERFORM. We view CEN as offering 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
When it Rains it Pours
Following ASM commentary that it has been a difficult start to FY20 for Contact Energy (CEN), the heavens opened, to the point where CEN has more water than it can handle. In addition, its deal to accelerate the removal of lower South Island transmission constraints and finalised 2020–2024 transmission prices lower than expected means it has been a good month for CEN. We have upgraded our FY20 EBTDAF forecast +$12m to $478m, lifted our target price +12cps to $8.15 and reiterate our OUTPERFORM rating.
What’s changed?

Earnings: FY20/FY21 EBITDAF lifted +$12m/+$12m to $478m/$495m
Target Price: Increased +12cps to $8.15
Rating: OUTPERFORM rating retained

Clutha spilling water after deluge
In the space of four weeks, CEN’s hydro storage levels have gone from ~-100GWh (-39%) below average to +180GWh (+56%) above average. The only time CEN has had more water in its lakes was 20 years ago (almost exactly), and it is no surprise CEN is spilling water at present.
Deal to relieve lower South Island transmission constraints a positive
CEN and Meridian Energy have paid $5m each to Transpower in order for it to start work earlier than it otherwise would have on relieving lower South Island transmission constraints. Whilst the transmission lines will only constrain in the event the aluminium smelter (NZAS) closes, it is a significant positive as it materially reduces the amount of lost hydro generation if NZAS were to close. In addition, it improves CEN’s negotiating position with NZAS (and the North Island generators). We have lowered our NZAS risk adjustment 3cps to -9cps.
FY20 earnings uplift on more water, offset by Transpower payment
We have lifted our FY20 EBITDAF forecast +$12m (+2.7%) to $478m. The increase is largely due to the increase in hydro storage, offset by the -$5m payment to Transpower and the fact EBITDAF to the end of October was tracking worse than expected. Our FY21 EBITDAF forecast has also increased +$12m (+2.5%) to $495m, mainly due to lower transmission and distribution prices following the Commerce Commission’s recent regulatory decisions.
The earnings uplifts and lower NZAS risk adjustment increases our target price +12cps (+1.5%) to $8.15.&nbsp;

Investment View
Our rating is OUTPERFORM. We view CEN as offering 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: When It Rains It Pours