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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>Big 2H Dry&nbsp;MELts&nbsp;Energy Margin - FY21 Result</h2>
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<p><strong>UNDERPERFORM</strong></p>
<p>Meridian Energy (MEL) reported FY21 EBITDAF of NZ$729m, broadly in line with our NZ$727m forecast and -15% down on the record FY20 result. Low 2H21 hydro generation and the rock bottom NZAS contract price which started mid-January 2021 are the reasons for the soft result vs. FY20. As expected, MEL declared an 11.2cps final dividend (FY21 16.9cps), flat on FY20. With MEL's balance sheet more stretched than normal and plans for future capex, we have pulled back our FY23 and FY24 dividend forecast so it is flat until after the completion of the Harapaki wind farm in 2024. This is the main reason for the -5cps (-1%) reduction in our target price to NZ$4.85. With a flat dividend outlook and an increasingly uncertain regulatory environment, our rating remains UNDERPERFORM.</p>
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<h3>What's changed?&nbsp;</h3>
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<ul>
<li><strong>Earnings</strong>:&nbsp;FY22/FY23/FY24 EBITDAF tweaked +NZ$3m/-NZ$4m/+NZ$7m to NZ$735m/NZ$740m/NZ$780m</li>
<li><strong>Dividend</strong>:&nbsp;FY23 and FY24 both lowered -0.3cps (-2%) to 16.9cps, in line with FY22 and flat on FY21</li>
<li><strong>Target price</strong>:&nbsp;Lowered -5cps (-1%) to NZ$4.85</li>
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<h3>Soft 2H21 hydro generation and revised NZAS contract&nbsp;bring MEL back down to earth&nbsp;</h3>
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<p>After a record FY20 and a solid 1H21, 2H21 was MEL's weakest 6 month result since 2H17. In addition to hydro generation volumes being -6% below average and the revised NZAS contract price, Australia had a very weak performance with the decline in wholesale electricity prices impacting on its generation returns and resulting in a 2H21 Energy Margin -NZ$19m (-33%) down on 2H20. Normalised FY21 NPAT fell -27% to NZ$231m. The softer result meant MEL's dividend free cash flow payout ratio was just inside its 75% to 90% payout ratio range at 89.5%.</p>
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<h3>Key take outs from the result</h3>
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<ul>
<li>MEL is making good progress on replacing NZAS demand. Its process heat demand pipeline is up +30% in the last three months to 171GWh and its target has lifted&nbsp;+100GWh to 600GWh.&nbsp;Datagrid&nbsp;is progressing its data centre plans and is close to acquiring land.</li>
<li>The development of a 100MW battery in conjunction with Contact Energy is&nbsp;likely to be brought forward to early 2023 (from late 2024) and MEL is&nbsp;ramping&nbsp;up development activity with a solar and wind project likely to go through the consenting phase in the near future.&nbsp;MEL's&nbsp;balance sheet capacity is being tested through the&nbsp;Harapaki&nbsp;development (we forecast net debt/EBITDAF peaks at&nbsp;~2.7x), hence, the decision to implement a dividend reinvestment plan and the flattening of our dividend outlook.</li>
<li>Operating cost&nbsp;pressures are coming through. FY22&nbsp;opex&nbsp;guidance of NZ$275m to NZ$280m was +NZ$17m higher than expected and +5% more than FY21. Cost pressures are coming from the growing retail base, software as a service reclassification (NZ$6m), increasing development activity and general inflation pressures.</li>
<li>MEL confirmed it will continue to grow retail, despite the strategy reducing short-term earnings given high wholesale prices.</li>
</ul>
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Meridian Energy Big 2H Dry&nbsp;MELts&nbsp;Energy Margin - FY21 Result

UNDERPERFORM
Meridian Energy (MEL) reported FY21 EBITDAF of NZ$729m, broadly in line with our NZ$727m forecast and -15% down on the record FY20 result. Low 2H21 hydro generation and the rock bottom NZAS contract price which started mid-January 2021 are the reasons for the soft result vs. FY20. As expected, MEL declared an 11.2cps final dividend (FY21 16.9cps), flat on FY20. With MEL's balance sheet more stretched than normal and plans for future capex, we have pulled back our FY23 and FY24 dividend forecast so it is flat until after the completion of the Harapaki wind farm in 2024. This is the main reason for the -5cps (-1%) reduction in our target price to NZ$4.85. With a flat dividend outlook and an increasingly uncertain regulatory environment, our rating remains UNDERPERFORM.


What's changed?&nbsp;



Earnings:&nbsp;FY22/FY23/FY24 EBITDAF tweaked +NZ$3m/-NZ$4m/+NZ$7m to NZ$735m/NZ$740m/NZ$780m
Dividend:&nbsp;FY23 and FY24 both lowered -0.3cps (-2%) to 16.9cps, in line with FY22 and flat on FY21
Target price:&nbsp;Lowered -5cps (-1%) to NZ$4.85



Soft 2H21 hydro generation and revised NZAS contract&nbsp;bring MEL back down to earth&nbsp;


After a record FY20 and a solid 1H21, 2H21 was MEL's weakest 6 month result since 2H17. In addition to hydro generation volumes being -6% below average and the revised NZAS contract price, Australia had a very weak performance with the decline in wholesale electricity prices impacting on its generation returns and resulting in a 2H21 Energy Margin -NZ$19m (-33%) down on 2H20. Normalised FY21 NPAT fell -27% to NZ$231m. The softer result meant MEL's dividend free cash flow payout ratio was just inside its 75% to 90% payout ratio range at 89.5%.


Key take outs from the result



MEL is making good progress on replacing NZAS demand. Its process heat demand pipeline is up +30% in the last three months to 171GWh and its target has lifted&nbsp;+100GWh to 600GWh.&nbsp;Datagrid&nbsp;is progressing its data centre plans and is close to acquiring land.
The development of a 100MW battery in conjunction with Contact Energy is&nbsp;likely to be brought forward to early 2023 (from late 2024) and MEL is&nbsp;ramping&nbsp;up development activity with a solar and wind project likely to go through the consenting phase in the near future.&nbsp;MEL's&nbsp;balance sheet capacity is being tested through the&nbsp;Harapaki&nbsp;development (we forecast net debt/EBITDAF peaks at&nbsp;~2.7x), hence, the decision to implement a dividend reinvestment plan and the flattening of our dividend outlook.
Operating cost&nbsp;pressures are coming through. FY22&nbsp;opex&nbsp;guidance of NZ$275m to NZ$280m was +NZ$17m higher than expected and +5% more than FY21. Cost pressures are coming from the growing retail base, software as a service reclassification (NZ$6m), increasing development activity and general inflation pressures.
MEL confirmed it will continue to grow retail, despite the strategy reducing short-term earnings given high wholesale prices.



Meridian Energy: Big 2H Dry MELts Energy Margin - FY21 Result