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>Genesis Energy</h2>
Slightly Underwhelming — FY19 Result Review
Whilst Genesis Energy’s (GNE) FY19 result was in line with expectations, the outlook is a little softer/lower quality than previously forecast. Higher capex, short-term Kupe challenges and a slightly lower dividend than hoped all left a slightly underwhelming outlook, but not materially so. Our target price and rating are unchanged at $3.18 and NEUTRAL respectively.
What’s changed?
<ul>
<li>Earnings: FY20 EBITDAF increased +$4m to $367m</li>
<li>Target Price: Unchanged at $3.18</li>
<li>Rating:&nbsp;NEUTRAL rating retained</li>
</ul>
Retail holds up FY19 result
GNE reported FY19 EBITDAF of $363m, in line with our forecast and marginally up on the pcp. In the context of record wholesale electricity prices, the result is slightly disappointing, albeit GNE had the worst of the operating conditions with the Pohokura gas outages flowing through into the need to import high cost coal and impacting GNE the most. The Retail performance was the standout aspect of the result, with all fuels (electricity, gas and LPG) performing well and lifting netback. Kupe’s contribution was flat (after adjusting for an accounting change).
Dividend path barely above inflation
GNE declared a final dividend of 8.6cps (80% imputed), the same as the pcp and -0.15cps lower than our forecast. Whilst holding the dividend flat is understandable given the high free cash flow payout ratio (close to 100%), FY19 dividend growth is only +0.9% and is less than inflation (although since FY15 GNE’s dividend growth is just above inflation). The dividend miss is small and immaterial, but points to GNE being keen to save cash.
Ok headline outlook numbers helped by accounting adjustments, but capex growth coming of more concern
FY20 EBITDAF guidance is $360m to $380m, consistent with past indications. However, FY20 will benefit +$7m in non-cash earnings from the adoption of IFRS 16. Similarly FY21 initial guidance of $400m to $420m ($400m+ being target earnings for the past three years) is propped up by the accounting change, so the quality is slightly lower than hoped. That said, the ~-$11m impact from lower Kupe production should reverse in FY22 once Kupe’s compression project is completed in mid-2021. The most disappointing aspect of the guidance commentary was GNE increasing maintenance capex guidance ~+$10m to between $50m and $70m. That has the greatest value effects.
Overall minor changes to forecast, no change to target price
Our FY20 to FY22 EBITDAF forecasts have not changed materially (up +1%, 0%, and down -2%), although our depreciation forecast has increased following GNE revaluing its assets upwards. Our target price is unchanged, with the negative effects of the higher capex outlook offsetting the positive impact of the reduction in our risk free rate assumption from 2.75% to 2.0%.&nbsp;
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Investment View
Our rating is NEUTRAL. GNE offers a sector leading dividend yield and solid earnings growth as its long-term gas contracts come to an end. However, overall we view GNE as fairly valued and its long-term transition to a post-coal generation world will pose challenges.
</div>
&nbsp;Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185

Genesis Energy
Slightly Underwhelming — FY19 Result Review
Whilst Genesis Energy’s (GNE) FY19 result was in line with expectations, the outlook is a little softer/lower quality than previously forecast. Higher capex, short-term Kupe challenges and a slightly lower dividend than hoped all left a slightly underwhelming outlook, but not materially so. Our target price and rating are unchanged at $3.18 and NEUTRAL respectively.
What’s changed?

Earnings: FY20 EBITDAF increased +$4m to $367m
Target Price: Unchanged at $3.18
Rating:&nbsp;NEUTRAL rating retained

Retail holds up FY19 result
GNE reported FY19 EBITDAF of $363m, in line with our forecast and marginally up on the pcp. In the context of record wholesale electricity prices, the result is slightly disappointing, albeit GNE had the worst of the operating conditions with the Pohokura gas outages flowing through into the need to import high cost coal and impacting GNE the most. The Retail performance was the standout aspect of the result, with all fuels (electricity, gas and LPG) performing well and lifting netback. Kupe’s contribution was flat (after adjusting for an accounting change).
Dividend path barely above inflation
GNE declared a final dividend of 8.6cps (80% imputed), the same as the pcp and -0.15cps lower than our forecast. Whilst holding the dividend flat is understandable given the high free cash flow payout ratio (close to 100%), FY19 dividend growth is only +0.9% and is less than inflation (although since FY15 GNE’s dividend growth is just above inflation). The dividend miss is small and immaterial, but points to GNE being keen to save cash.
Ok headline outlook numbers helped by accounting adjustments, but capex growth coming of more concern
FY20 EBITDAF guidance is $360m to $380m, consistent with past indications. However, FY20 will benefit +$7m in non-cash earnings from the adoption of IFRS 16. Similarly FY21 initial guidance of $400m to $420m ($400m+ being target earnings for the past three years) is propped up by the accounting change, so the quality is slightly lower than hoped. That said, the ~-$11m impact from lower Kupe production should reverse in FY22 once Kupe’s compression project is completed in mid-2021. The most disappointing aspect of the guidance commentary was GNE increasing maintenance capex guidance ~+$10m to between $50m and $70m. That has the greatest value effects.
Overall minor changes to forecast, no change to target price
Our FY20 to FY22 EBITDAF forecasts have not changed materially (up +1%, 0%, and down -2%), although our depreciation forecast has increased following GNE revaluing its assets upwards. Our target price is unchanged, with the negative effects of the higher capex outlook offsetting the positive impact of the reduction in our risk free rate assumption from 2.75% to 2.0%.&nbsp;

Investment View
Our rating is NEUTRAL. GNE offers a sector leading dividend yield and solid earnings growth as its long-term gas contracts come to an end. However, overall we view GNE as fairly valued and its long-term transition to a post-coal generation world will pose challenges.

&nbsp;Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185

Genesis Energy: Slightly Underwhelming — FY19 Result Review