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<br>Upgrading on NZAS Upside Potential</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>We are upgrading our Genesis Energy (GNE) rating to OUTPERFORM from NEUTRAL as there is an increasing chance NZAS will remain open for longer, making&nbsp;GNE's&nbsp;dividend very attractive in a low interest rate environment. Whilst our forecasts assume NZAS closes in August 2021, if NZAS remains open for longer, we expect GNE to deliver a fully imputed FY21 dividend of ~17.5cps, which equates to a gross dividend yield of 8.1%. Factoring in a 50% chance of NZAS staying open (which is conservative vs. what the electricity futures market is implying) has been the driver for our +38cps (+13%) target price increase to NZ$3.38/share.</p>
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<h3>Current long-term forecasts reflect NZAS closing in August 2021, but electricity market is confident of an extension</h3>
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<p>The electricity market is increasingly confident that NZAS will remain open beyond August 2021. We estimate that the ASX electricity futures market is pricing in a 75% to 85% chance NZAS will remain open in FY22 and 50% to 60% chance in FY23. The loss of&nbsp;swaption&nbsp;revenue, being slightly long gas (albeit not as much as 2010s), retail price competition and high gearing if NZAS were to close resulted in our 14cps dividend forecast. If&nbsp;NZAS remains open, those downside risks are alleviated, enabling GNE to maintain its current policy to grow dividends at (or above) inflation. Factoring in a 50% chance of NZAS staying open has been the main driver of our +38cps (+13%) target price increase. GNE is good value at current levels and we upgrade to OUTPERFORM. Assuming NZAS remains open and GNE trades on a gross dividend yield similar to what it did in mid-2019, a share price above NZ$3.50 appears likely.</p>
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<h3>Positive start to FY21 with dry conditions resulting increased thermal generation</h3>
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<p>1Q21 has generally been positive for GNE. Whilst North Island hydro generation was below average, the country as a whole had below average hydro generation, requiring GNE to run its thermal plant harder. A lift in our FY21 generation assumption and firming wholesale electricity prices has lifted our FY21 EBITDAF forecast +NZ$5m to NZ$403m. Our FY22 and beyond forecasts are unchanged as we await the fate of NZAS.</p>
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<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>
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<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>
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Genesis Energy Upgrading on NZAS Upside Potential

OUTPERFORM
We are upgrading our Genesis Energy (GNE) rating to OUTPERFORM from NEUTRAL as there is an increasing chance NZAS will remain open for longer, making&nbsp;GNE's&nbsp;dividend very attractive in a low interest rate environment. Whilst our forecasts assume NZAS closes in August 2021, if NZAS remains open for longer, we expect GNE to deliver a fully imputed FY21 dividend of ~17.5cps, which equates to a gross dividend yield of 8.1%. Factoring in a 50% chance of NZAS staying open (which is conservative vs. what the electricity futures market is implying) has been the driver for our +38cps (+13%) target price increase to NZ$3.38/share.


Current long-term forecasts reflect NZAS closing in August 2021, but electricity market is confident of an extension


The electricity market is increasingly confident that NZAS will remain open beyond August 2021. We estimate that the ASX electricity futures market is pricing in a 75% to 85% chance NZAS will remain open in FY22 and 50% to 60% chance in FY23. The loss of&nbsp;swaption&nbsp;revenue, being slightly long gas (albeit not as much as 2010s), retail price competition and high gearing if NZAS were to close resulted in our 14cps dividend forecast. If&nbsp;NZAS remains open, those downside risks are alleviated, enabling GNE to maintain its current policy to grow dividends at (or above) inflation. Factoring in a 50% chance of NZAS staying open has been the main driver of our +38cps (+13%) target price increase. GNE is good value at current levels and we upgrade to OUTPERFORM. Assuming NZAS remains open and GNE trades on a gross dividend yield similar to what it did in mid-2019, a share price above NZ$3.50 appears likely.


Positive start to FY21 with dry conditions resulting increased thermal generation


1Q21 has generally been positive for GNE. Whilst North Island hydro generation was below average, the country as a whole had below average hydro generation, requiring GNE to run its thermal plant harder. A lift in our FY21 generation assumption and firming wholesale electricity prices has lifted our FY21 EBITDAF forecast +NZ$5m to NZ$403m. Our FY22 and beyond forecasts are unchanged as we await the fate of NZAS.



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





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Genesis Energy: Upgrading on NZAS Upside Potential