New Zealand Professional Investment Services Firm

Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Mercury<br>Back to the Future&nbsp;— TPW Retail Joins the Fold</h2>
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<p><strong>UNDERPERFORM</strong></p>
<p>Mercury's (MCY) NZ$441m acquisition of&nbsp;Trustpower's&nbsp;(TPW) retail business more than doubles its connection numbers, providing its retail business with scale and enables MCY to enter the broadband market. Execution will be critically important if MCY is to deliver +NZ$35m of synergy benefits by FY24, which is on top of the NZ$55m EBITDAF the transaction is expected to provide. Whilst the deal adds to&nbsp;MCY's&nbsp;EBITDAF growth profile, it also adds to its growing debt position such that we have left our dividend forecast unchanged until FY24. Whilst we are slightly positive on the deal (the price paid is not unreasonable) MCY remains expensive in our view, and we retain our UNDERPERFORM rating.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY21 unchanged, FY22/FY23/FY24 EBITDAF increased +NZ$8m/+$46m/+$69m to NZ$577m/$710m/$768m</li>
<li><strong>Target price</strong>:&nbsp;Increased +10cps (+1.7%) to NZ$6.10/share</li>
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<h3>Acquisition will see MCY become the largest mass market energy retailer, provides scale</h3>
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<p>It is back to the future for CEO Vince&nbsp;Hawksworth&nbsp;as he adds another TPW business to MCY (Tilt&nbsp;Renewables&nbsp;NZ assets being the other). The deal transforms&nbsp;MCY's&nbsp;retail business and it will become the largest electricity retailer by connections, ~+100k more than Genesis Energy (GNE) and have a 27% market share. It also becomes the second largest gas retailer and enables MCY to enter the&nbsp;telco&nbsp;market, a source of cross-selling opportunities. We also suspect a driver of the transaction is it helps justify a&nbsp;transformative&nbsp;IT spend, as both the MCY and&nbsp;TPW IT platforms need&nbsp;investment. Whilst forecast transition costs are a substantial NZ$50m, MCY is targeting synergy benefits of NZ$35m from FY24 onwards (NZ$30m reduced&nbsp;opex, NZ$5m reduced&nbsp;capex).</p>
<p>Overall, we are modestly positive on the acquisition. The price paid appears reasonable (and is a little less than we though might be paid) and the strategic benefits of the deal are clear. However, MCY has a lot on its plate at present and execution will be important.</p>
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<h3>Debt levels to rise temporarily, dividend path unchanged as we expect MCY will want to digest this investment</h3>
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<p>MCY is funding the NZ$441m transaction with debt and takes FY22 net investment spending to NZ$0.7b. We are forecasting net debt/EBITDAF will top out at 3.0x in FY22, but expect that metric to fall quickly as earnings growth kicks in. Our FY24 EBITDAF forecast is now NZ$769m, greater than +NZ$300m more than the recently downgraded FY21 EBITDAF forecast. MCY's dividend is not at risk, in our view. That said, we have left our FY22 and FY23 dividend forecast unchanged at 19cps and 24cps respectively as we expect MCY will want to digest its investments and repay debt.</p>
<p>Our forecast changes assume the transaction completes on 31 December 2021, and includes the expected EBITDAF increase as well as initial transition costs. The real earnings growth will not kick-in until FY24.</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>Mark Robertson</strong></div>
<div><a href="mailto:mark.robertson@forsythbarr.co.nz" target="_blank" rel="noopener">mark.robertson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 495 5264</div>
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Mercury Back to the Future&nbsp;— TPW Retail Joins the Fold

UNDERPERFORM
Mercury's (MCY) NZ$441m acquisition of&nbsp;Trustpower's&nbsp;(TPW) retail business more than doubles its connection numbers, providing its retail business with scale and enables MCY to enter the broadband market. Execution will be critically important if MCY is to deliver +NZ$35m of synergy benefits by FY24, which is on top of the NZ$55m EBITDAF the transaction is expected to provide. Whilst the deal adds to&nbsp;MCY's&nbsp;EBITDAF growth profile, it also adds to its growing debt position such that we have left our dividend forecast unchanged until FY24. Whilst we are slightly positive on the deal (the price paid is not unreasonable) MCY remains expensive in our view, and we retain our UNDERPERFORM rating.


What's changed?&nbsp;



Earnings:&nbsp;FY21 unchanged, FY22/FY23/FY24 EBITDAF increased +NZ$8m/+$46m/+$69m to NZ$577m/$710m/$768m
Target price:&nbsp;Increased +10cps (+1.7%) to NZ$6.10/share



Acquisition will see MCY become the largest mass market energy retailer, provides scale


It is back to the future for CEO Vince&nbsp;Hawksworth&nbsp;as he adds another TPW business to MCY (Tilt&nbsp;Renewables&nbsp;NZ assets being the other). The deal transforms&nbsp;MCY's&nbsp;retail business and it will become the largest electricity retailer by connections, ~+100k more than Genesis Energy (GNE) and have a 27% market share. It also becomes the second largest gas retailer and enables MCY to enter the&nbsp;telco&nbsp;market, a source of cross-selling opportunities. We also suspect a driver of the transaction is it helps justify a&nbsp;transformative&nbsp;IT spend, as both the MCY and&nbsp;TPW IT platforms need&nbsp;investment. Whilst forecast transition costs are a substantial NZ$50m, MCY is targeting synergy benefits of NZ$35m from FY24 onwards (NZ$30m reduced&nbsp;opex, NZ$5m reduced&nbsp;capex).
Overall, we are modestly positive on the acquisition. The price paid appears reasonable (and is a little less than we though might be paid) and the strategic benefits of the deal are clear. However, MCY has a lot on its plate at present and execution will be important.


Debt levels to rise temporarily, dividend path unchanged as we expect MCY will want to digest this investment


MCY is funding the NZ$441m transaction with debt and takes FY22 net investment spending to NZ$0.7b. We are forecasting net debt/EBITDAF will top out at 3.0x in FY22, but expect that metric to fall quickly as earnings growth kicks in. Our FY24 EBITDAF forecast is now NZ$769m, greater than +NZ$300m more than the recently downgraded FY21 EBITDAF forecast. MCY's dividend is not at risk, in our view. That said, we have left our FY22 and FY23 dividend forecast unchanged at 19cps and 24cps respectively as we expect MCY will want to digest its investments and repay debt.
Our forecast changes assume the transaction completes on 31 December 2021, and includes the expected EBITDAF increase as well as initial transition costs. The real earnings growth will not kick-in until FY24.



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





Mark Robertson
mark.robertson@forsythbarr.co.nz
+64 4 495 5264



Mercury: Back to the Future — TPW Retail Joins the Fold

Mercury NZ Ltd

Mercury: Back to the Future — TPW Retail Joins the Fold