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>Meridian Energy<br>Joining the Development Train — 1H21 Result</h2>
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<p><strong>UNDERPERFORM</strong></p>
<p>There were no surprises in Meridian Energy's (MEL) 1H21 result and even the announcement it is progressing its&nbsp;Harapaki&nbsp;wind farm was expected. The result itself was strong, albeit EBITDAF of NZ$422m is -9% lower than the record prior period. The interim dividend of 5.7cps was flat on 1H20 and investors should not expect significant dividend growth as MEL (and the sector generally) moves into a development phase. From a value perspective, rising interest rates is a headwind for yield investments such as MEL and we have cut our target price -8% to NZ$5.10. We retain our UNDERPERFORM rating.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/190/673/original/image_78857359451614211581256.png?1614211584" class="editor-image img-responsive" data-smartkarma-image-id="190673"></figure>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings:</strong>&nbsp;FY21/FY22/FY23 EBITDAF down -NZ$13m/-NZ$1m/-NZ$2m to NZ$701m/NZ$741m/NZ$756m</li>
<li><strong>Target price</strong>:&nbsp;Reduced -45cps (-8%) to NZ$5.10</li>
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<h3>Harapaki&nbsp;gets the green light as MEL joins the generation development bandwagon</h3>
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<p>As expected, MEL has decided to push go on its 176MW, NZ$395m Harapaki wind farm development option. Whilst the metrics do not appear as attractive as Turitea and Waipipi (refer Fig. 2), the Hawkes Bay location is better and given the consent expires in the near future it is understandable MEL is pushing ahead. The project is value accretive (we estimate 3cps to 6cps), albeit it has already been incorporated into our forecasts. MEL has also indicated it has a battery and wind farm development option in Australia that it is progressing. All of these investments are designed to support MEL's retail businesses in New Zealand and Australia.</p>
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<h3>Result a good one in historic terms, but down on the record 1H20</h3>
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<p>MEL's&nbsp;1H21 EBITDAF of NZ$422m was -9% lower than the record 1H20 period, due mainly to lower New&nbsp;Zealand&nbsp;hydro generation volumes. It is, however, the second best 1H for MEL, +8% better than 1H19. The result was also impacted by lower Australia wholesale electricity prices lowering the Australian contribution. The main upside came from lower transmission costs, down -NZ$24m. MEL declared an 86% imputed interim dividend of 5.7cps, the same as 1H20. With MEL commencing a new development and contemplating a dividend reinvestment plan, we assume modest dividend growth going forward, linked to earnings growth.</p>
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<h3>Minor forecast changes, but rising interest rates hurt&nbsp;MEL's&nbsp;value proposition</h3>
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<p>With conditions getting drier, we have trimmed our FY21 EBITDAF forecast -NZ$13m (-2%) to NZ$701m. Longer dated forecasts are largely unchanged. The more substantive change we have made is to our target price, cut -45cps to NZ$5.10. Cost of capital changes due to higher interest rates impact negatively on yield based stocks such as MEL. Our DCF is -10% lower to NZ$4.54. The spot valuation changes are summarised in Figure 5.</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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Meridian Energy Joining the Development Train — 1H21 Result

UNDERPERFORM
There were no surprises in Meridian Energy's (MEL) 1H21 result and even the announcement it is progressing its&nbsp;Harapaki&nbsp;wind farm was expected. The result itself was strong, albeit EBITDAF of NZ$422m is -9% lower than the record prior period. The interim dividend of 5.7cps was flat on 1H20 and investors should not expect significant dividend growth as MEL (and the sector generally) moves into a development phase. From a value perspective, rising interest rates is a headwind for yield investments such as MEL and we have cut our target price -8% to NZ$5.10. We retain our UNDERPERFORM rating.


What's changed?&nbsp;



Earnings:&nbsp;FY21/FY22/FY23 EBITDAF down -NZ$13m/-NZ$1m/-NZ$2m to NZ$701m/NZ$741m/NZ$756m
Target price:&nbsp;Reduced -45cps (-8%) to NZ$5.10



Harapaki&nbsp;gets the green light as MEL joins the generation development bandwagon


As expected, MEL has decided to push go on its 176MW, NZ$395m Harapaki wind farm development option. Whilst the metrics do not appear as attractive as Turitea and Waipipi (refer Fig. 2), the Hawkes Bay location is better and given the consent expires in the near future it is understandable MEL is pushing ahead. The project is value accretive (we estimate 3cps to 6cps), albeit it has already been incorporated into our forecasts. MEL has also indicated it has a battery and wind farm development option in Australia that it is progressing. All of these investments are designed to support MEL's retail businesses in New Zealand and Australia.


Result a good one in historic terms, but down on the record 1H20


MEL's&nbsp;1H21 EBITDAF of NZ$422m was -9% lower than the record 1H20 period, due mainly to lower New&nbsp;Zealand&nbsp;hydro generation volumes. It is, however, the second best 1H for MEL, +8% better than 1H19. The result was also impacted by lower Australia wholesale electricity prices lowering the Australian contribution. The main upside came from lower transmission costs, down -NZ$24m. MEL declared an 86% imputed interim dividend of 5.7cps, the same as 1H20. With MEL commencing a new development and contemplating a dividend reinvestment plan, we assume modest dividend growth going forward, linked to earnings growth.


Minor forecast changes, but rising interest rates hurt&nbsp;MEL's&nbsp;value proposition


With conditions getting drier, we have trimmed our FY21 EBITDAF forecast -NZ$13m (-2%) to NZ$701m. Longer dated forecasts are largely unchanged. The more substantive change we have made is to our target price, cut -45cps to NZ$5.10. Cost of capital changes due to higher interest rates impact negatively on yield based stocks such as MEL. Our DCF is -10% lower to NZ$4.54. The spot valuation changes are summarised in Figure 5.



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: Joining the Development Train — 1H21 Result