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</h2>
Off to a Flier — 1Q20 Operating Performance
Meridian Energy’s (MEL) remarkable operational performance has continued into FY20 and we estimate EBITDAF is tracking ~+NZ$45m ahead of the pcp. We are upgrading our FY20 EBITDAF forecast +NZ$61m to NZ$820m as we expect the favourable conditions to continue for a period yet. Whilst we have lifted our target price +5cps to $4.25, we retain our UNDERPERFORM rating as MEL remains the most expensive generator/retailer in the market.
What’s changed?
<ul>
<li>Earnings: FY20 EBITDAF increased +$61m to $820m</li>
<li>Target Price: Increased +5cps to $4.25</li>
<li>Rating: UNDERPERFORM rating retained</li>
</ul>
Strong beginning in New Zealand, but weak in Australia
MEL has started FY20 where it ended FY19. We estimate that 1Q20 EBITDAF is NZ$257m, +NZ$45m ahead of the pcp with New Zealand operating conditions continuing to be favourable. Retail volumes (+17%), average retail prices (+2.4%), generation volumes (+3.6%) and generation prices (+47%) are all tracking well ahead of the pcp. We calculate the NZ Energy margin for 1Q20 was NZ$320m, +NZ$54m up on the pcp.
However, the strong NZ performance is offset by weaker Australian figures. Difficult retail conditions and the continued drought have impacted on earnings. We estimate the 1Q20 Australian Energy Margin was A$32m, -A$6m (-NZ$8m) lower than the pcp. In addition, operating costs are tracking well ahead of last year (although MEL had signalled this).
Earnings upgrade based on 1Q20 performance and expected strong conditions for the remainder of 1H20
We have lifted our FY20 EBITDAF forecast +NZ$61m to NZ$820m. The driver of the uplift is the strong start and the expectation the next few months will continue to be favourable for MEL. That said, we note all of the outperformance is expected in 1H20, with 2H20 facing some transmission related headwinds. In addition, we have lowered our Australian contribution.
We have lifted our dividend forecast modestly (+0.2cps in FY20 to 21.6cps) which is a reflection of MEL’s “above average” FY19 dividend meaning we are not passing more of the earnings upgrade into the dividend.
Our +5cps target price is modest as the short-term earnings uplift only equates to ~+1.5cps, and our longer-term forecasts, whilst increasing, have not increased materially.&nbsp;
<div class="content-highlight">
Investment View
Our rating is UNDERPERFORM. Whilst MEL is a high quality stock, in our view it offers less value than alternative electricity generator/retailers. Short-term trading conditions have been strong, highlighted by the FY19 result and start to FY20. However, underlying earnings are materially lower than what current operating results indicate.&nbsp;
</div>
<a target="_blank"></a><a target="_blank">Andrew Harvey-Green</a>
<a target="_blank">andrew.harvey-green@forsythbarr.co.nz</a>
<a target="_blank">+64 4 495 8185</a>

Meridian Energy
Off to a Flier — 1Q20 Operating Performance
Meridian Energy’s (MEL) remarkable operational performance has continued into FY20 and we estimate EBITDAF is tracking ~+NZ$45m ahead of the pcp. We are upgrading our FY20 EBITDAF forecast +NZ$61m to NZ$820m as we expect the favourable conditions to continue for a period yet. Whilst we have lifted our target price +5cps to $4.25, we retain our UNDERPERFORM rating as MEL remains the most expensive generator/retailer in the market.
What’s changed?

Earnings: FY20 EBITDAF increased +$61m to $820m
Target Price: Increased +5cps to $4.25
Rating: UNDERPERFORM rating retained

Strong beginning in New Zealand, but weak in Australia
MEL has started FY20 where it ended FY19. We estimate that 1Q20 EBITDAF is NZ$257m, +NZ$45m ahead of the pcp with New Zealand operating conditions continuing to be favourable. Retail volumes (+17%), average retail prices (+2.4%), generation volumes (+3.6%) and generation prices (+47%) are all tracking well ahead of the pcp. We calculate the NZ Energy margin for 1Q20 was NZ$320m, +NZ$54m up on the pcp.
However, the strong NZ performance is offset by weaker Australian figures. Difficult retail conditions and the continued drought have impacted on earnings. We estimate the 1Q20 Australian Energy Margin was A$32m, -A$6m (-NZ$8m) lower than the pcp. In addition, operating costs are tracking well ahead of last year (although MEL had signalled this).
Earnings upgrade based on 1Q20 performance and expected strong conditions for the remainder of 1H20
We have lifted our FY20 EBITDAF forecast +NZ$61m to NZ$820m. The driver of the uplift is the strong start and the expectation the next few months will continue to be favourable for MEL. That said, we note all of the outperformance is expected in 1H20, with 2H20 facing some transmission related headwinds. In addition, we have lowered our Australian contribution.
We have lifted our dividend forecast modestly (+0.2cps in FY20 to 21.6cps) which is a reflection of MEL’s “above average” FY19 dividend meaning we are not passing more of the earnings upgrade into the dividend.
Our +5cps target price is modest as the short-term earnings uplift only equates to ~+1.5cps, and our longer-term forecasts, whilst increasing, have not increased materially.&nbsp;

Investment View
Our rating is UNDERPERFORM. Whilst MEL is a high quality stock, in our view it offers less value than alternative electricity generator/retailers. Short-term trading conditions have been strong, highlighted by the FY19 result and start to FY20. However, underlying earnings are materially lower than what current operating results indicate.&nbsp;

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

Meridian Energy: Off to a Flier — 1Q20 Operating Performance