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

Mercury Dry Conditions Squeeze FY22 Outlook — 2Q22

UNDERPERFORM
Mercury’s (MCY) 2Q22 operating statistics came packaged with a -150GWh (-4%) reduction in FY22 hydro generation guidance to 3,750GWh and a subsequent -NZ$20m (-3%) downgrade to FY22 EBITDAF guidance to NZ$570m. We are more conservative, and lower our FY22 EBITDAF forecast -NZ$29m to NZ$561m and assume hydro generation of 3,650GWh given North Island January inflows are a record low. Long-term earnings are unchanged. 2Q22 operating stats displayed a solid retail performance and the first full quarter of wind generation from the acquired Tilt assets. We have trimmed our target price -2cps due to the earnings cut and maintain our UNDERPERFORM rating given interest rate headwinds and political/regulatory risk.


What's changed?&nbsp;



Earnings:&nbsp;FY22 EBITDAF decreased -NZ$29m (-5%) to NZ$561m
Target price:&nbsp;-2cps lower to NZ$5.83



Short term cuts to forecast, long term outlook unchanged


We decrease FY22 EBITDAF -NZ$29m to NZ$561m in response to low hydro generation volumes and record low inflows in January 2022.&nbsp;MCY's&nbsp;hydro storage is currently just&nbsp;below average having started 2022 ~+15% above. In addition, the short-term outlook is for continued dry weather. Our FY22 hydro generation assumption is -100GWh below&nbsp;MCY's&nbsp;guidance. We leave later forecasts&nbsp;broadly unchanged.


Operating stats display resilient performances in light of hydro challenges


MCY had an overall&nbsp;+23% lift in generation on the&nbsp;pcp, almost exclusively from wind which was a combination of&nbsp;the acquired&nbsp;Tilt&nbsp;windfarms&nbsp;as well as&nbsp;its new&nbsp;Turitea&nbsp;windfarm. Geothermal generation returned to full capacity after 1Q22 was impacted by the&nbsp;Kawerau&nbsp;outage, while hydro was -9% down on average&nbsp;it was&nbsp;flat on the prior period. The retail performance was good ahead of the&nbsp;Trustpower&nbsp;retail acquisition with&nbsp;total sales volumes up +7.5% due to a +23% increase in Commercial &amp; Industrial (C&amp;I), offsetting a moderate -4% Mass Market (MM) decline.&nbsp;There were modest increases in both the MM&nbsp;(+3%) and C&amp;I&nbsp;(+11%) prices, consistent with&nbsp;previous quarters and recent strong wholesale electricity prices.


1H22 forecast


MCY will report its 1H22 result on Tuesday, 22 February 2022. Our EBITDAF forecast is NZ$274m, -NZ$20m lower than 1H21 due to the flow on effects of a difficult 4Q21. Our interim dividend forecast of 8cps is +1.2cps (+18%) up on 1H21 and consistent with MCY's FY22 dividend guidance of 20cps.


Mercury: Dry Conditions Squeeze FY22 Outlook — 2Q22

Mercury NZ Ltd

Mercury: Dry Conditions Squeeze FY22 Outlook — 2Q22