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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Meridian Energy</h2>
One in T<a target="_blank"></a>wenty Year Rain Event
Meridian Energy’s (MEL) incredible run continues with its hydro storage lakes almost doubling in the past four weeks, with only a very wet November 1999 getting anywhere close. In addition, its deal to accelerate the removal of lower South Island transmission constraints and finalised 2020–2024 transmission prices lower than expected mean it has been a good month for MEL. We have upgraded our FY20 EBITDAF forecast +$36m to $852m, lifted our target price +14cps to $4.25, but maintain our NEUTRAL rating.
What’s changed?
<ul>
<li>Earnings: FY20 EBITDAF increased +$36m (+4.4%) to $852m</li>
<li>Target Price: Increased +14cps (+3.4%) to $4.25</li>
<li>Rating: NEUTRAL rating retained</li>
</ul>
Pukaki close to full, Manapouri spilling water
MEL’s hydro storage is particularly strong. In the past four weeks storage has increased +1,069GWh, a twenty year high. Hydro storage is +832GWh above average for this time of year and snow storage is estimated to be +185GWh above average — putting MEL into a very strong position for the remainder of FY20.
Deal to relieve lower South Island transmission constraints a positive
MEL and Contact Energy have paid $5m each to Transpower in order for it to start work earlier than it otherwise would have on relieving lower South Island transmission constraints. Whilst the transmission lines will only constrain in the event the aluminium smelter (NZAS) closes, it is a significant positive as it materially reduces the amount of lost hydro generation if NZAS were to close. In addition, it improves MEL’s negotiating position with NZAS (and the North Island generators). We have lowered our NZAS risk adjustment 1cps to -7cps.
Australia proving to be tough going
Whilst the New Zealand operation is performing well, Australia is struggling in comparison. The year-to-date (to end of October 2019) Australia Energy Margin is -NZ$8m below the pcp, with a combination of the drought and regulatory price caps lowering earnings.
FY20 earnings uplift on hydro position, FY21 increased too
We have increased our FY20 EBITDAF forecast +$36m to $852m (which is now higher than the remarkable record FY19). Driving the uplift is the increase in hydro storage and the relatively muted response in the wholesale electricity market. Partially offsetting the increase is higher operating costs (up +$12m including the $5m payment to Transpower) and a lower Australia contribution (down -$5m). Looking ahead to FY21, we anticipate that MEL will start FY21 with above average water levels, which combined with lower than expected transmission costs, has increased our FY21 EBITDAF forecast +$26m to $778m. We have also increased our target price +14cps (+3.4%) to $4.25.&nbsp;
<div class="content-highlight">
Investment View
Our rating is NEUTRAL. MEL has been the strongest electricity performer in recent years and its low cost generation assets provides it with a strong defensive position. Its dividend yield is attractive, although we expect that will fall in FY22 when the current capital management programme ends.&nbsp;
</div>
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185

Meridian Energy
One in Twenty Year Rain Event
Meridian Energy’s (MEL) incredible run continues with its hydro storage lakes almost doubling in the past four weeks, with only a very wet November 1999 getting anywhere close. In addition, its deal to accelerate the removal of lower South Island transmission constraints and finalised 2020–2024 transmission prices lower than expected mean it has been a good month for MEL. We have upgraded our FY20 EBITDAF forecast +$36m to $852m, lifted our target price +14cps to $4.25, but maintain our NEUTRAL rating.
What’s changed?

Earnings: FY20 EBITDAF increased +$36m (+4.4%) to $852m
Target Price: Increased +14cps (+3.4%) to $4.25
Rating: NEUTRAL rating retained

Pukaki close to full, Manapouri spilling water
MEL’s hydro storage is particularly strong. In the past four weeks storage has increased +1,069GWh, a twenty year high. Hydro storage is +832GWh above average for this time of year and snow storage is estimated to be +185GWh above average — putting MEL into a very strong position for the remainder of FY20.
Deal to relieve lower South Island transmission constraints a positive
MEL and Contact Energy have paid $5m each to Transpower in order for it to start work earlier than it otherwise would have on relieving lower South Island transmission constraints. Whilst the transmission lines will only constrain in the event the aluminium smelter (NZAS) closes, it is a significant positive as it materially reduces the amount of lost hydro generation if NZAS were to close. In addition, it improves MEL’s negotiating position with NZAS (and the North Island generators). We have lowered our NZAS risk adjustment 1cps to -7cps.
Australia proving to be tough going
Whilst the New Zealand operation is performing well, Australia is struggling in comparison. The year-to-date (to end of October 2019) Australia Energy Margin is -NZ$8m below the pcp, with a combination of the drought and regulatory price caps lowering earnings.
FY20 earnings uplift on hydro position, FY21 increased too
We have increased our FY20 EBITDAF forecast +$36m to $852m (which is now higher than the remarkable record FY19). Driving the uplift is the increase in hydro storage and the relatively muted response in the wholesale electricity market. Partially offsetting the increase is higher operating costs (up +$12m including the $5m payment to Transpower) and a lower Australia contribution (down -$5m). Looking ahead to FY21, we anticipate that MEL will start FY21 with above average water levels, which combined with lower than expected transmission costs, has increased our FY21 EBITDAF forecast +$26m to $778m. We have also increased our target price +14cps (+3.4%) to $4.25.&nbsp;

Investment View
Our rating is NEUTRAL. MEL has been the strongest electricity performer in recent years and its low cost generation assets provides it with a strong defensive position. Its dividend yield is attractive, although we expect that will fall in FY22 when the current capital management programme ends.&nbsp;

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

Meridian Energy: One in Twenty Year Rain Event