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<br>Navigating Volatile Waters</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Mercury (MCY) had a solid 3Q21, although it has had to draw on stored water to achieve that outcome as generation volumes were higher than hydro inflows. MCY has left FY21 EBITDAF and hydro generation guidance unchanged. We have made no substantive&nbsp;changes to our forecasts and our target price remains NZ$6.10. Our rating is NEUTRAL. Whilst MCY offers the best earnings and dividend growth profile over the next two years, in our view that growth is priced in.</p>
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<h3>Solid 3Q21 as MCY navigates volatile market</h3>
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<p>Despite hydro inflows being well below average, hydro generation was above average for the quarter. That has come at the expense of hydro storage, albeit current storage levels are at a familiar level for this time of year.</p>
<p>Retail sales volumes increased +1.0%, with all of the growth coming in the commercial and industrial (+16.6%) segment, compared to a -9.6% fall in the mass market segment (due mainly to customer number declines).&nbsp;However, MCY has reduced financial contract sales volumes, meaning total physical and financial sales volumes fell -1.5%. Pricing continues to lift, up +4.7%, with mass market prices increasing +9.6% (a combination of lower lines charges and avoiding discounting offers).</p>
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<h3>No substantive changes to forecasts</h3>
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<p>In maintaining FY21 hydro generation and EBITDAF guidance at 3,800GWh and NZ$520m respectively, MCY has acknowledged that it is likely to start FY22 with below average lake levels. Lake Taupo is currently ~-100GWh below average. Whilst we have altered various assumptions (wholesale electricity price increases in FY21 &amp; FY22, small hydro generation volume reductions, reduced retail sales as commercial volume growth was less than expected), the net effect is relatively minor. We have increased our FY21 EBITDAF forecast +NZ$2m to NZ$524m, and our FY22 EBITDAF forecast is -NZ$2m lower at NZ$631m.</p>
<p>FY22 is likely to be a watershed year for MCY as it incorporates wind farm generation from the soon to be acquired&nbsp;Tilt&nbsp;Renewables'&nbsp;(TLT) New Zealand assets and from its&nbsp;Turitea&nbsp;wind farm development for the first time. We are forecasting EBITDAF growth of more than +NZ$100m (+20%) and a +26% increase in the dividend to 21.5cps.</p>
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<h3>Increased certainty on TLT NZ asset purchase costs NZ$4m</h3>
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<p>MCY has had to stump up a further NZ$4m to ensure it secures the TLT NZ assets and to prevent additional counter-proposals. MCY did well limiting the additional cost to only NZ$4m, as its prorata share of the price uplift was NZ$7m. Whilst having to pay a little more is frustrating, the additional cost is minor in the context of the strategic benefits the TLT assets will bring MCY. &nbsp;The transaction is expected to complete in August 2021.</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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Mercury Navigating Volatile Waters

NEUTRAL
Mercury (MCY) had a solid 3Q21, although it has had to draw on stored water to achieve that outcome as generation volumes were higher than hydro inflows. MCY has left FY21 EBITDAF and hydro generation guidance unchanged. We have made no substantive&nbsp;changes to our forecasts and our target price remains NZ$6.10. Our rating is NEUTRAL. Whilst MCY offers the best earnings and dividend growth profile over the next two years, in our view that growth is priced in.


Solid 3Q21 as MCY navigates volatile market


Despite hydro inflows being well below average, hydro generation was above average for the quarter. That has come at the expense of hydro storage, albeit current storage levels are at a familiar level for this time of year.
Retail sales volumes increased +1.0%, with all of the growth coming in the commercial and industrial (+16.6%) segment, compared to a -9.6% fall in the mass market segment (due mainly to customer number declines).&nbsp;However, MCY has reduced financial contract sales volumes, meaning total physical and financial sales volumes fell -1.5%. Pricing continues to lift, up +4.7%, with mass market prices increasing +9.6% (a combination of lower lines charges and avoiding discounting offers).


No substantive changes to forecasts


In maintaining FY21 hydro generation and EBITDAF guidance at 3,800GWh and NZ$520m respectively, MCY has acknowledged that it is likely to start FY22 with below average lake levels. Lake Taupo is currently ~-100GWh below average. Whilst we have altered various assumptions (wholesale electricity price increases in FY21 &amp; FY22, small hydro generation volume reductions, reduced retail sales as commercial volume growth was less than expected), the net effect is relatively minor. We have increased our FY21 EBITDAF forecast +NZ$2m to NZ$524m, and our FY22 EBITDAF forecast is -NZ$2m lower at NZ$631m.
FY22 is likely to be a watershed year for MCY as it incorporates wind farm generation from the soon to be acquired&nbsp;Tilt&nbsp;Renewables'&nbsp;(TLT) New Zealand assets and from its&nbsp;Turitea&nbsp;wind farm development for the first time. We are forecasting EBITDAF growth of more than +NZ$100m (+20%) and a +26% increase in the dividend to 21.5cps.


Increased certainty on TLT NZ asset purchase costs NZ$4m


MCY has had to stump up a further NZ$4m to ensure it secures the TLT NZ assets and to prevent additional counter-proposals. MCY did well limiting the additional cost to only NZ$4m, as its prorata share of the price uplift was NZ$7m. Whilst having to pay a little more is frustrating, the additional cost is minor in the context of the strategic benefits the TLT assets will bring MCY. &nbsp;The transaction is expected to complete in August 2021.



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





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



Mercury NZ Ltd

Mercury: Navigating Volatile Waters