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</h2>
Still Calling the Smelter's Bluff
The fall in electricity share prices in the past two weeks presents a buying opportunity for investors seeking high quality&nbsp;defensive&nbsp;yield. A combination of renewed&nbsp;NZAS&nbsp;closure fears and&nbsp;COVID-19 related fears has resulted in the increase in average gross dividend yield vs. the 10-year swap rate to&nbsp;16-month highs. We continue to view the risk of&nbsp;NZAS&nbsp;closure as low&nbsp;and with interest rates likely to remain lower for longer, the electricity stocks are looking attractive at present.
Spread to bond rates expands
The average electricity sector gross dividend yield has increased to 6.4% from a low 5.6% in September 2019 and the spread to the 10-year swap rate has increased to 5.3%, the highest since October 2018. With interest rates more likely to trend lower, the key question for investors is whether earnings are at risk.&nbsp;If not, the current pull back in electricity prices represents a good buying opportunity. We are of the view that the earnings outlook has not changed.
Increased&nbsp;NZAS&nbsp;fears overstated
Part of the negative share price reaction is increased fear&nbsp;NZAS&nbsp;is about to close. In our view, nothing has changed. The losses&nbsp;NZAS&nbsp;and Rio&nbsp;Tinto&nbsp;(RIO) have reported are due mainly to higher internal alumina costs. Underlying market conditions were not materially different in 2019 vs. 2018. Second, discussions are ongoing between all parties. Whilst&nbsp;MEL's&nbsp;offer to&nbsp;NZAS&nbsp;is materially short of what&nbsp;NZAS&nbsp;is seeking, transmission remains a likely source of lower power costs. We maintain our view that&nbsp;NZAS&nbsp;is likely to remain open.
Earnings not at risk from&nbsp;COVID-19
The second issue impacting share prices is&nbsp;COVID-19. It is hard to see a scenario where electricity sector earnings would be impacted. Furthermore, central banks are reacting by lowering interest rates, helping electricity sector valuations.&nbsp;
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185&nbsp;
Scott Anderson scott.anderson@forsythbarr.co.nz +64 4 914 2219

Electricity Sector
Still Calling the Smelter's Bluff
The fall in electricity share prices in the past two weeks presents a buying opportunity for investors seeking high quality&nbsp;defensive&nbsp;yield. A combination of renewed&nbsp;NZAS&nbsp;closure fears and&nbsp;COVID-19 related fears has resulted in the increase in average gross dividend yield vs. the 10-year swap rate to&nbsp;16-month highs. We continue to view the risk of&nbsp;NZAS&nbsp;closure as low&nbsp;and with interest rates likely to remain lower for longer, the electricity stocks are looking attractive at present.
Spread to bond rates expands
The average electricity sector gross dividend yield has increased to 6.4% from a low 5.6% in September 2019 and the spread to the 10-year swap rate has increased to 5.3%, the highest since October 2018. With interest rates more likely to trend lower, the key question for investors is whether earnings are at risk.&nbsp;If not, the current pull back in electricity prices represents a good buying opportunity. We are of the view that the earnings outlook has not changed.
Increased&nbsp;NZAS&nbsp;fears overstated
Part of the negative share price reaction is increased fear&nbsp;NZAS&nbsp;is about to close. In our view, nothing has changed. The losses&nbsp;NZAS&nbsp;and Rio&nbsp;Tinto&nbsp;(RIO) have reported are due mainly to higher internal alumina costs. Underlying market conditions were not materially different in 2019 vs. 2018. Second, discussions are ongoing between all parties. Whilst&nbsp;MEL's&nbsp;offer to&nbsp;NZAS&nbsp;is materially short of what&nbsp;NZAS&nbsp;is seeking, transmission remains a likely source of lower power costs. We maintain our view that&nbsp;NZAS&nbsp;is likely to remain open.
Earnings not at risk from&nbsp;COVID-19
The second issue impacting share prices is&nbsp;COVID-19. It is hard to see a scenario where electricity sector earnings would be impacted. Furthermore, central banks are reacting by lowering interest rates, helping electricity sector valuations.&nbsp;
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185&nbsp;
Scott Anderson scott.anderson@forsythbarr.co.nz +64 4 914 2219

Electricity Sector: Still Calling the Smelter's Bluff

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Electricity Sector: Still Calling the Smelter's Bluff