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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Meridian Energy<br>Australia for Sale</h2>
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<p><strong>UNDERPERFORM</strong></p>
<p>Meridian Energy (MEL) has formally announced a strategic review of its Australian business, having strongly indicated that was likely at its recent investor day. We see this move as logical given recent transactions, the sub-scale nature of the business and potential capital requirements in New Zealand. However, Australia is only a small part of MEL's overall business, with the Australian EBITDAF contribution going forward likely to be ~6%. A successful sale is, therefore, only likely to add +2cps to +14cps to our value, not enough to change our view MEL is expensive. UNDERPERFORM.</p>
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<h3>Strategic reasons for a sale</h3>
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<li>Australian renewable assets are fetching strong prices</li>
<li>The retail business has struggled to grow at the pace desired, with more hard work ahead of it</li>
<li>If long-term electricity demand growth comes through as expected, MEL will likely need the capital to build new generation in NZ</li>
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<h3>What are&nbsp;MEL's&nbsp;Australian assets?</h3>
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<p>MEL has created a small vertically integrated business in Australia, with renewable generation sold to its Powershop branded retail business. Total customer numbers are 185k, it owns two wind farms totalling 201MW and several small hydro stations totalling 92MW. MEL started the retail business in 2014 and has had steady growth ever since, but our analysis suggests it has yet to create EBITDAF earnings. Its two wind farms, Mt Millar and Mt Mercer were built in 2010 and 2014 respectively, so have yet to reach their mid-life and the hydro assets were bought in 2018 from Trustpower (TPW).</p>
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<h3>Sales process is likely to have its challenges</h3>
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<p>MEL faces several challenges relative to other recent sector transactions. Its renewable assets do not have offtake arrangements (although MEL could sell the renewable assets with an offtake agreement to its retail business) and its development pipeline is limited, reducing its attractiveness. Its retail business is small and yet to turn an EBITDAF profit, although that is not necessarily an impediment for the right buyer. MEL is open to a partial sale of its assets, although we suspect it would prefer to exit all of its Australian assets (or none of them). MEL has not provided an expected timetable, stating the review is likely to take several months.</p>
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<h3>High level analysis suggests a modest potential upside from a sale</h3>
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<p>We estimate the total business could sell for between NZ$670m and NZ$970m. This compares to our DCF value of ~NZ$590m, suggesting upside of between +3cps and +14cps. Whilst recent transaction multiples have been attractive, we do not expect MEL will be able to generate the same level of interest that Tilt Renewables (TLT) achieved.&nbsp;</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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Meridian Energy Australia for Sale

UNDERPERFORM
Meridian Energy (MEL) has formally announced a strategic review of its Australian business, having strongly indicated that was likely at its recent investor day. We see this move as logical given recent transactions, the sub-scale nature of the business and potential capital requirements in New Zealand. However, Australia is only a small part of MEL's overall business, with the Australian EBITDAF contribution going forward likely to be ~6%. A successful sale is, therefore, only likely to add +2cps to +14cps to our value, not enough to change our view MEL is expensive. UNDERPERFORM.


Strategic reasons for a sale



Australian renewable assets are fetching strong prices
The retail business has struggled to grow at the pace desired, with more hard work ahead of it
If long-term electricity demand growth comes through as expected, MEL will likely need the capital to build new generation in NZ



What are&nbsp;MEL's&nbsp;Australian assets?


MEL has created a small vertically integrated business in Australia, with renewable generation sold to its Powershop branded retail business. Total customer numbers are 185k, it owns two wind farms totalling 201MW and several small hydro stations totalling 92MW. MEL started the retail business in 2014 and has had steady growth ever since, but our analysis suggests it has yet to create EBITDAF earnings. Its two wind farms, Mt Millar and Mt Mercer were built in 2010 and 2014 respectively, so have yet to reach their mid-life and the hydro assets were bought in 2018 from Trustpower (TPW).


Sales process is likely to have its challenges


MEL faces several challenges relative to other recent sector transactions. Its renewable assets do not have offtake arrangements (although MEL could sell the renewable assets with an offtake agreement to its retail business) and its development pipeline is limited, reducing its attractiveness. Its retail business is small and yet to turn an EBITDAF profit, although that is not necessarily an impediment for the right buyer. MEL is open to a partial sale of its assets, although we suspect it would prefer to exit all of its Australian assets (or none of them). MEL has not provided an expected timetable, stating the review is likely to take several months.


High level analysis suggests a modest potential upside from a sale


We estimate the total business could sell for between NZ$670m and NZ$970m. This compares to our DCF value of ~NZ$590m, suggesting upside of between +3cps and +14cps. Whilst recent transaction multiples have been attractive, we do not expect MEL will be able to generate the same level of interest that Tilt Renewables (TLT) achieved.&nbsp;




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




Meridian Energy

Meridian Energy: Australia for Sale