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<br>Selling More, Generating Less</h2>
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<p><strong>UNDERPERFORM</strong></p>
<p>Meridian Energy's (MEL) March 2021 operating statistics rounded off its worst quarter since listing, primarily due to low hydro generation and a drop in the NZAS contract price. We estimate that&nbsp;MEL's&nbsp;March 2021 NZ Energy Margin was NZ$72m, -NZ$15m lower than March 2020. The 3Q21 NZ Energy Margin of NZ$195m was below NZ$200m for the first time since listing, down -26% on 3Q20. With no relief to current hydro conditions in sight, we have trimmed our EBITDAF forecast -NZ$11m (-2%) to NZ$690m, and reduced our target price -20cps to NZ$4.90.&nbsp; UNDERPERFORM.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY21/FY22/FY23 EBITDAF down&nbsp;-NZ$11m/-NZ$8m/-NZ$13m to NZ$690/NZ$733m/NZ$743m</li>
<li><strong>Dividend</strong>:&nbsp; No change to FY21 forecast. FY22/FY23 forecasts trimmed slightly&nbsp;— we expect limited near-term dividend&nbsp;growth</li>
<li>Target price:&nbsp;Reduced -20cps (-4%) to&nbsp;NZ$4.90</li>
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<h3>Hydro conditions continue to deteriorate, closing in on calling NZAS to reduce demand</h3>
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<p>Soft hydro conditions are hampering MEL. In recent years favourable hydro conditions, along with high wholesale electricity prices, have lifted earnings. The lack of low cost generation and the drop in the NZAS price have reduced profitability such that MEL's earnings momentum has turned negative in a meaningful way for the first time since listing. The year to date generation/wholesale performance is down -NZ$278m vs. last year, only partially offset by +NZ$92m hedging gains, hence, EBITDAF is tracking ​​​​​​​​​​​​-NZ$136m ​​​​​​​(-20%) lower than FY20. MEL is close to asking NZAS to reduce its demand, with hydro storage needing to fall ~-230GWh before the trigger point is reached, which could take as little as two weeks (but may not be needed at all if it rains).</p>
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<h3>Retail sales growth continues in March</h3>
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<p>MEL saw total retail sales growth of +16% in March 2021, with small/medium enterprise (SME) and corporate sales volumes up +27% and +24% respectively. Large business and residential sales volumes fell -2% and -3% respectively. This&nbsp;mix change led to&nbsp;a reduction in the average selling price of -0.7%. During high wholesale electricity periods, growing the retail book is a negative and we expect MEL will be looking closely at its retail strategy.</p>
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<h3>Generation assumption lowered, retail sales volumes increased, and Australia softness all contribute to weaker forecast</h3>
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<p>Continued low hydro generation, continued strong retail volume growth and a weak Australia contribution are driving the -NZ11m (-2%) reduction in FY21 EBITDAF. We now assume hydro conditions will impact the beginning of FY22, but also assume MEL will dial back recontracting commercial volumes, such that FY22 retail volumes will be lower than FY21. Australia's performance has been impacted by the closing out of renewable energy certificates at a loss. This should be a one-off.</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 Selling More, Generating Less

UNDERPERFORM
Meridian Energy's (MEL) March 2021 operating statistics rounded off its worst quarter since listing, primarily due to low hydro generation and a drop in the NZAS contract price. We estimate that&nbsp;MEL's&nbsp;March 2021 NZ Energy Margin was NZ$72m, -NZ$15m lower than March 2020. The 3Q21 NZ Energy Margin of NZ$195m was below NZ$200m for the first time since listing, down -26% on 3Q20. With no relief to current hydro conditions in sight, we have trimmed our EBITDAF forecast -NZ$11m (-2%) to NZ$690m, and reduced our target price -20cps to NZ$4.90.&nbsp; UNDERPERFORM.


What's changed?&nbsp;



Earnings:&nbsp;FY21/FY22/FY23 EBITDAF down&nbsp;-NZ$11m/-NZ$8m/-NZ$13m to NZ$690/NZ$733m/NZ$743m
Dividend:&nbsp; No change to FY21 forecast. FY22/FY23 forecasts trimmed slightly&nbsp;— we expect limited near-term dividend&nbsp;growth
Target price:&nbsp;Reduced -20cps (-4%) to&nbsp;NZ$4.90



Hydro conditions continue to deteriorate, closing in on calling NZAS to reduce demand


Soft hydro conditions are hampering MEL. In recent years favourable hydro conditions, along with high wholesale electricity prices, have lifted earnings. The lack of low cost generation and the drop in the NZAS price have reduced profitability such that MEL's earnings momentum has turned negative in a meaningful way for the first time since listing. The year to date generation/wholesale performance is down -NZ$278m vs. last year, only partially offset by +NZ$92m hedging gains, hence, EBITDAF is tracking ​​​​​​​​​​​​-NZ$136m ​​​​​​​(-20%) lower than FY20. MEL is close to asking NZAS to reduce its demand, with hydro storage needing to fall ~-230GWh before the trigger point is reached, which could take as little as two weeks (but may not be needed at all if it rains).


Retail sales growth continues in March


MEL saw total retail sales growth of +16% in March 2021, with small/medium enterprise (SME) and corporate sales volumes up +27% and +24% respectively. Large business and residential sales volumes fell -2% and -3% respectively. This&nbsp;mix change led to&nbsp;a reduction in the average selling price of -0.7%. During high wholesale electricity periods, growing the retail book is a negative and we expect MEL will be looking closely at its retail strategy.


Generation assumption lowered, retail sales volumes increased, and Australia softness all contribute to weaker forecast


Continued low hydro generation, continued strong retail volume growth and a weak Australia contribution are driving the -NZ11m (-2%) reduction in FY21 EBITDAF. We now assume hydro conditions will impact the beginning of FY22, but also assume MEL will dial back recontracting commercial volumes, such that FY22 retail volumes will be lower than FY21. Australia's performance has been impacted by the closing out of renewable energy certificates at a loss. This should be a one-off.



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: Selling More, Generating Less