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>Mercury</h2>
Better Prices, Weaker Volumes — 2Q20 Operating Statistics
Mercury’s (MCY) 2Q20 was characterised by weaker generation and sales volumes, but the sales volumes were at better prices. Whilst we have downgraded FY20 EBITDAF slightly on the weaker than expected sales volumes (down -$5m to $511m), we believe MCY is well positioned for 2H20.
What’s changed?
<ul>
<li>Earnings: FY20 EBITDAF lowered -$5m to $511m</li>
<li>Target Price: Down -2cps to $4.60</li>
<li>Rating: NEUTRAL rating retained</li>
</ul>
Better prices offset weaker volumes
Retail prices were strong, with mass market prices lifting +2.3% and commercial prices increasing +7.6%. We suspect the increase in mass market prices was partly mix related as low-priced Farm Source connections were not in 2Q20 figures. Commercial pricing showed a strong uplift as more high-priced contracts (due to the strength of wholesale electricity prices) are added to MCY’s portfolio.
However, generation volumes were off -8.5% and retail sales volumes were off -6.1% vs. pcp. Mass market sales were down -11.4% due to lower connection numbers (down -6.6% vs. pcp) and the loss of the high volume (low margin) Farm Source connections. Geothermal generation volumes were weak due to scheduled maintenance.
Setting up for strong 2H20
Contributing to the low generation volumes, MCY deliberately held back water in 2Q20 so that it could start 2H20 with above average hydro storage volumes. Wholesale electricity prices are expected to firm during 3Q20 due to gas field and HVDC outages which should enable MCY to make more from its generation in 3Q20 than it otherwise did in 2Q20.
Minor forecast changes
Both the sales volumes and generation volumes were a little below expectations, hence, we have pulled back our FY20 EBITDAF forecast -$5m to $511m — close to MCY’s $510m guidance. Later forecasts are little changed.
Our 1H20 EBITDAF forecast is $254m, -$48m lower than the pcp (which was remarkably strong). MCY will be reporting its 1H20 result on Tuesday, 25 February.&nbsp;
<div class="content-highlight">
Investment View
Our rating is NEUTRAL. MCY is a strong operator in the sector with well-positioned generation assets. Whilst its near-term dividend yield is the lowest in the sector, we expect that to improve following the completion of its Turitea windfarm in 2021. Overall we see MCY as fairly valued.&nbsp;
</div>
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185

Mercury
Better Prices, Weaker Volumes — 2Q20 Operating Statistics
Mercury’s (MCY) 2Q20 was characterised by weaker generation and sales volumes, but the sales volumes were at better prices. Whilst we have downgraded FY20 EBITDAF slightly on the weaker than expected sales volumes (down -$5m to $511m), we believe MCY is well positioned for 2H20.
What’s changed?

Earnings: FY20 EBITDAF lowered -$5m to $511m
Target Price: Down -2cps to $4.60
Rating: NEUTRAL rating retained

Better prices offset weaker volumes
Retail prices were strong, with mass market prices lifting +2.3% and commercial prices increasing +7.6%. We suspect the increase in mass market prices was partly mix related as low-priced Farm Source connections were not in 2Q20 figures. Commercial pricing showed a strong uplift as more high-priced contracts (due to the strength of wholesale electricity prices) are added to MCY’s portfolio.
However, generation volumes were off -8.5% and retail sales volumes were off -6.1% vs. pcp. Mass market sales were down -11.4% due to lower connection numbers (down -6.6% vs. pcp) and the loss of the high volume (low margin) Farm Source connections. Geothermal generation volumes were weak due to scheduled maintenance.
Setting up for strong 2H20
Contributing to the low generation volumes, MCY deliberately held back water in 2Q20 so that it could start 2H20 with above average hydro storage volumes. Wholesale electricity prices are expected to firm during 3Q20 due to gas field and HVDC outages which should enable MCY to make more from its generation in 3Q20 than it otherwise did in 2Q20.
Minor forecast changes
Both the sales volumes and generation volumes were a little below expectations, hence, we have pulled back our FY20 EBITDAF forecast -$5m to $511m — close to MCY’s $510m guidance. Later forecasts are little changed.
Our 1H20 EBITDAF forecast is $254m, -$48m lower than the pcp (which was remarkably strong). MCY will be reporting its 1H20 result on Tuesday, 25 February.&nbsp;

Investment View
Our rating is NEUTRAL. MCY is a strong operator in the sector with well-positioned generation assets. Whilst its near-term dividend yield is the lowest in the sector, we expect that to improve following the completion of its Turitea windfarm in 2021. Overall we see MCY as fairly valued.&nbsp;

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

Mercury: Better Prices, Weaker Volumes — 2Q20 Operating Statistics

Mercury NZ Ltd

Mercury: Better Prices, Weaker Volumes — 2Q20 Operating Statistics