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

Meridian Energy In&nbsp;a State of Flux — FY20 Result Review

OUTPERFORM
Meridian Energy (MEL) delivered the expected record FY20 result, with&nbsp;EBITDAF&nbsp;up +2% on the very strong FY19 performance. However,&nbsp;NZAS&nbsp;is the main focus at present, but there was little new information. MEL and the industry remains in a state of flux, awaiting a decision on whether&nbsp;NZAS&nbsp;will remain open for a little longer. Speaking of Flux, that was the only modest disappointment, with the IT migration project delayed and the UK revenue outlook uncertain. We've made little change to our forecasts, with the +70cps (+15%) increase in our target price driven by cost of capital changes.


Delivering another record result — but Flux a slight negative


A year ago, after MEL's stellar FY19 result, we were reasonably confident that result wouldn't be repeated, but it has been. FY20 EBITDAF was NZ$854m, +NZ$16m higher than FY19. Record generation volumes (above 14TWh for the first time) and continued retail improvement (volumes up +18% and average selling price up +3%) more than offset lower wholesale electricity prices, the 2H HVDC outage and increased opex. Normalised NPAT of NZ$317m was -5% lower than FY19 due to increased depreciation.


Final dividend pitched at bottom of the dividend policy payout range — 75%


MEL's&nbsp;final dividend of 11.2cps (86% imputed) takes its&nbsp;FY20 dividend to 16.9cps, up +3%. As previously indicated the "special" dividends have&nbsp;ceased so the total FY20 dividend of 19.3cps is -9% lower than FY19. Looking ahead, investors should expect flat dividends of 16.9cps, with growth not resuming for several years. If&nbsp;NZAS&nbsp;delays closure, that should bring dividend growth forward.


No new news on&nbsp;NZAS, mitigation work ongoing


There was no new news on NZAS, with the negotiation ball currently in the government's court. However, mitigation work continues. MEL confirmed its Harapaki wind farm in Hawkes Bay has been deferred (good news). MEL has a little bit of time available, with resource consents expiring at the end of 2023. We expect that if NZAS does remain open a little longer Harapaki will get the go-ahead fairly quickly. Encouragingly, MEL indicated there is strong interest for new South Island demand, including dairy factory coal-boiler conversions data centres, hydrogen and carbon capture projects. New lower South Island demand is the best outcome for MEL. However, it is unclear how much of the "interest" is simply "tyre-kicking" and none will be ready for at least three years. MEL also reiterated its next best alternative is to grow its retail book, raising the spectre of intense retail price competition.


Modest changes to near-term forecasts, but material increase in&nbsp;DCF&nbsp;valuation due to cost of capital assumption changes


Our base assumption remains that NZAS will close in August 2021 and we have not incorporated anything into our forecasts for increased South Island demand (i.e. risks are to the upside). Our forecasts are little changed, with Transpower's positive transmission announcement offset by UK Flux revenue ending in FY23. However, the lowering of our cost of capital assumption to 5.1% (from 6.8%) has lifted our DCF valuation +48% and is the main driver behind the +15% increase in our target price to NZ$5.50/share.



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





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



Meridian Energy: In a State of Flux — FY20 Result Review