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>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