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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Mercury Taking a Tilt at Wind

NEUTRAL
In one fell swoop, once it has acquired Tilt Renewables' (TLT) New Zealand assets, Mercury (MCY) will become one of New Zealand's largest wind farm owners. MCY is acquiring TLT's NZ assets for NZ$770m at an FY22 EV/EBITDAF multiple of 15.4x. We are positive on the deal as the price paid is reasonable (aided by the price it is receiving for its share of TLT's Australian assets) and the strategic benefits are significant. We estimate that the acquisition will lift MCY's dividends +3cps, ~+15%. We are lifting our target price +NZ$0.35 (+6%) to NZ$6.10/share and upgrade our rating to NEUTRAL.


What's changed?&nbsp;



Earnings:&nbsp;FY21 EBITDAF&nbsp;unchanged, FY22/FY23 increased +NZ$40m/+NZ$52m (+7%/+8%) to NZ$633m/NZ$668m
Target price:&nbsp;Increased +35cps (+6%) to NZ$6.10/share
Rating:&nbsp;Upgraded to&nbsp;NEUTRAL from UNDERPERFORM



Strong deal on several counts, upgrading to NEUTRAL


MCY's&nbsp;acquisition of&nbsp;TLT's&nbsp;NZ&nbsp;assets is&nbsp;transformative&nbsp;and strategically a good move. In one transaction it will be a leading wind generator in NZ, with wind generation volumes equal to Meridian Energy (MEL).&nbsp;MCY's&nbsp;generation portfolio will be the most diversified renewable portfolio with wind making up ~23% of&nbsp;MCY's&nbsp;generation in normal years (hydro ~57% and geothermal ~31%). In addition, MCY now has a strong development pipeline as it has acquired all of&nbsp;TLT's&nbsp;development options.&nbsp;
MCY is paying&nbsp;NZ$770m for&nbsp;TLT's&nbsp;NZ assets at an EV/EBITDAF multiple of 15.4x. The price is relatively full, however, is sweetened significantly by the price MCY is receiving for its TLT holding. The NZ$7.80/share TLT transaction price means MCY will receive NZ$586.5m, with the implied FY22 EV/EBITDAF multiple&nbsp;for the Australian assets 37.4x. The deal adds ~NZ$50m EBITDAF (TLT is currently an associate) for a net outlay of ~NZ$185m, which should result in a ~+3cps increase in&nbsp;MCY's&nbsp;dividend&nbsp;— another reason we&nbsp;like the deal. We are lifting our target price +6% to NZ$6.10, due in large part to the price MCY is receiving for its TLT holding.


Several months to go before the transaction is completed, but it looks like a done deal


The transaction should be a formality from here, albeit it is expected to take ~five months to complete. The Scheme Implementation Arrangement is subject to OIO and FIRB approval in NZ and Australia respectively, although that should not be an issue given the acquirers of the NZ and Australian assets of TLT are local. The deal needs 75% shareholder approval, but with Infratil and MCY together owning 85% this also is not an issue. New Zealand High Court approval is also required.



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: Taking a Tilt at Wind