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>Tough 1Q21 - Downgrading to NEUTRAL</h2>
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<p><strong>NEUTRAL</strong></p>
<p>We are downgrading our Meridian Energy (MEL) rating to NEUTRAL following a tough 1Q21 and due to limited dividend upside, even if NZAS remains open. Following two stellar years, 1Q21 has proved to be more challenging with below average hydrology impacting earnings such that we are downgrading our FY21 EBITDAF forecast -NZ$46m (-6%) to NZ$748m. In addition, relative to other electricity stocks dividend upside if NZAS remains open beyond August 2021 is limited due to MEL likely having to provide a significant&nbsp;electricity price discount to NZAS and due to record FY20 earnings pushing up&nbsp;MEL's&nbsp;ordinary dividend. We have trimmed our target price -6cps to NZ$5.44/share.</p>
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<h3>Rating downgrade to NEUTRAL</h3>
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<p>There are two factors that have lead to our rating downgrade. First, relative to other electricity stocks, there is limited dividend upside if NZAS remains open. Strong FY20 earnings pushed up the FY20 ordinary dividend, such that even at the top end of MEL's free cash flow payout range (75% to 90%), it needs ~NZ$720m EBITDAF to maintain its current 16.9cps ordinary dividend (although MEL has indicated it is prepared to temporarily go above the 90% payout if necessary). Given the support MEL will provide NZAS to stay open, we expect earnings to be around NZ$700m if NZAS stays (lower if NZAS closes). We do not expect MEL will reinstate its capital management "special" dividend.</p>
<p>The second issue is the short-term headwinds MEL is facing from below average hydro generation.</p>
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<h3>FY21 forecast downgraded on lower generation volumes</h3>
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<p>We have cut our FY21 EBITDAF forecast -6% to NZ$748m, with a -4% (-490GWh) reduction in our generation volume assumption the main driver of the decline. Our FY22 and beyond forecasts are unchanged as we await the final decision on NZAS.</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 Tough 1Q21 - Downgrading to NEUTRAL

NEUTRAL
We are downgrading our Meridian Energy (MEL) rating to NEUTRAL following a tough 1Q21 and due to limited dividend upside, even if NZAS remains open. Following two stellar years, 1Q21 has proved to be more challenging with below average hydrology impacting earnings such that we are downgrading our FY21 EBITDAF forecast -NZ$46m (-6%) to NZ$748m. In addition, relative to other electricity stocks dividend upside if NZAS remains open beyond August 2021 is limited due to MEL likely having to provide a significant&nbsp;electricity price discount to NZAS and due to record FY20 earnings pushing up&nbsp;MEL's&nbsp;ordinary dividend. We have trimmed our target price -6cps to NZ$5.44/share.


Rating downgrade to NEUTRAL


There are two factors that have lead to our rating downgrade. First, relative to other electricity stocks, there is limited dividend upside if NZAS remains open. Strong FY20 earnings pushed up the FY20 ordinary dividend, such that even at the top end of MEL's free cash flow payout range (75% to 90%), it needs ~NZ$720m EBITDAF to maintain its current 16.9cps ordinary dividend (although MEL has indicated it is prepared to temporarily go above the 90% payout if necessary). Given the support MEL will provide NZAS to stay open, we expect earnings to be around NZ$700m if NZAS stays (lower if NZAS closes). We do not expect MEL will reinstate its capital management "special" dividend.
The second issue is the short-term headwinds MEL is facing from below average hydro generation.


FY21 forecast downgraded on lower generation volumes


We have cut our FY21 EBITDAF forecast -6% to NZ$748m, with a -4% (-490GWh) reduction in our generation volume assumption the main driver of the decline. Our FY22 and beyond forecasts are unchanged as we await the final decision on NZAS.



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: Tough 1Q21 - Downgrading to NEUTRAL