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>Rains Return to Boost Earnings - 1Q22 Op Stats</h2>
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<p><strong>UNDERPERFORM</strong></p>
<p>We calculate that Meridian Energy (MEL) had its strongest September operating performance on record, courtesy of hydro generation +17% ahead of average. However, it was not all plain sailing, with a soft Australian retail performance pointing to a more challenging future for that business. EBITDAF forecast changes reflect the strong start to FY22, the weaker than expected Australian retail performance and the early conclusion of the UK Flux contract. The -10cps (-2.1%) reduction in our target price to NZ$4.75 is a function of rising interest rates. With the Electricity Authority set to release its wholesale electricity market review next week, we remain cautious on the regulatory outlook and retain our UNDERPERFORM rating.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY22E/FY23E/FY24E EBITDAF +NZ$11m/-NZ$10m/+NZ$8m to NZ$746m/NZ$730m/NZ$788m</li>
<li><strong>Target price</strong>:&nbsp;Reduced -10cps (-2.1%) to NZ$4.75</li>
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<h3>Strong 1Q22 driven by hydro powered September 2021</h3>
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<p>MEL's&nbsp;September 2021 performance was largely&nbsp;about strong&nbsp;hydro generation, boosting 1Q22 earnings comfortably ahead of 1Q21.&nbsp;1Q22 hydro generation was +6%&nbsp;above average&nbsp;and was particularly strong in September (+17% above average). That said, retail growth continues to be a key contributor&nbsp;with 1Q22 retail sales climbing +12% and prices increasing +3.3%. Overall, we estimate the NZ Energy Margin in 1Q22 was NZ$283m, +NZ$22m (+8%) up on 1Q21. Also boosting 1Q22 was a one-off settlement as the Flux UK contract wraps&nbsp;up, lifting estimated other revenue +NZ$8m.</p>
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<h3>Australian retail earnings dip as strategic review nears the end</h3>
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<p>Whilst the NZ performance was strong, Australia retail has had its challenges, and we estimate its 1Q22 contribution is -A$14m down on 1Q21, with pricing the key issue. The September 2021 average retail price was -38% lower than September 2020. Some of that downside has been offset by improved generation volumes and hedging gains. MEL indicated that the Australian strategic review is on schedule to be completed before Christmas, with a conclusion towards the end of November likely. Our estimated value of the Australian business is between NZ$670m and NZ$970m, with the top end of the range delivering ~+15cps on&nbsp;valuation.</p>
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<h3>Lifting FY22 EBITDAF, but FY23 dips on lower Australian contribution</h3>
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<p>Our forecast changes reflect the strong 1Q22 performance and we have lifted the FY22 NZ Energy Margin +NZ$18m to NZ$1,019m. However, a&nbsp;lower Australian contribution is a partial offset such that our FY22 EBITDAF forecast increases&nbsp;+NZ$11m to NZ$746m. FY23 is also impacted by Australia and the earlier than expected conclusion of the UK Flux contract (benefits FY22, hurts FY23).</p>
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Meridian Energy Rains Return to Boost Earnings - 1Q22 Op Stats

UNDERPERFORM
We calculate that Meridian Energy (MEL) had its strongest September operating performance on record, courtesy of hydro generation +17% ahead of average. However, it was not all plain sailing, with a soft Australian retail performance pointing to a more challenging future for that business. EBITDAF forecast changes reflect the strong start to FY22, the weaker than expected Australian retail performance and the early conclusion of the UK Flux contract. The -10cps (-2.1%) reduction in our target price to NZ$4.75 is a function of rising interest rates. With the Electricity Authority set to release its wholesale electricity market review next week, we remain cautious on the regulatory outlook and retain our UNDERPERFORM rating.


What's changed?&nbsp;



Earnings:&nbsp;FY22E/FY23E/FY24E EBITDAF +NZ$11m/-NZ$10m/+NZ$8m to NZ$746m/NZ$730m/NZ$788m
Target price:&nbsp;Reduced -10cps (-2.1%) to NZ$4.75



Strong 1Q22 driven by hydro powered September 2021


MEL's&nbsp;September 2021 performance was largely&nbsp;about strong&nbsp;hydro generation, boosting 1Q22 earnings comfortably ahead of 1Q21.&nbsp;1Q22 hydro generation was +6%&nbsp;above average&nbsp;and was particularly strong in September (+17% above average). That said, retail growth continues to be a key contributor&nbsp;with 1Q22 retail sales climbing +12% and prices increasing +3.3%. Overall, we estimate the NZ Energy Margin in 1Q22 was NZ$283m, +NZ$22m (+8%) up on 1Q21. Also boosting 1Q22 was a one-off settlement as the Flux UK contract wraps&nbsp;up, lifting estimated other revenue +NZ$8m.


Australian retail earnings dip as strategic review nears the end


Whilst the NZ performance was strong, Australia retail has had its challenges, and we estimate its 1Q22 contribution is -A$14m down on 1Q21, with pricing the key issue. The September 2021 average retail price was -38% lower than September 2020. Some of that downside has been offset by improved generation volumes and hedging gains. MEL indicated that the Australian strategic review is on schedule to be completed before Christmas, with a conclusion towards the end of November likely. Our estimated value of the Australian business is between NZ$670m and NZ$970m, with the top end of the range delivering ~+15cps on&nbsp;valuation.


Lifting FY22 EBITDAF, but FY23 dips on lower Australian contribution


Our forecast changes reflect the strong 1Q22 performance and we have lifted the FY22 NZ Energy Margin +NZ$18m to NZ$1,019m. However, a&nbsp;lower Australian contribution is a partial offset such that our FY22 EBITDAF forecast increases&nbsp;+NZ$11m to NZ$746m. FY23 is also impacted by Australia and the earlier than expected conclusion of the UK Flux contract (benefits FY22, hurts FY23).


Meridian Energy: Rains Return to Boost Earnings - 1Q22 Op Stats