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><a target="_blank">Power Points</a></h2>
MEL &amp; CEN Happy as Santa — December 2019<a target="_blank"></a>
Meridian Energy (MEL) and Contact Energy (CEN) have both had a strong November 2019 for several reasons. First, record hydro inflows into the South Island catchments has replenished storage levels and set them up for the foreseeable future. Second, they have combined to get Transpower to start work on relieving lower South Island transmission constraints earlier than it otherwise would have. Third, Transpower’s HVDC charges are going to be lower than anticipated, providing an earnings tailwind in FY21 and beyond. We have lifted our MEL and CEN target prices +14cps and +12cps respectively.
Record breaking month for hydro generators
Over the past four weeks South Island hydro storage has almost doubled, increasing +1,770GWh to 3,492GWh. All of the South Island generators have benefitted. However, whilst wholesale electricity prices fell modestly (Benmore averaged $93/MWh in November 2019, -21% lower than October), $93/MWh is still a high price considering national lake storage is ~155% of average. Plant outages and the ongoing tight gas market have meant the ASX futures prices barely registered the lift in hydro storage volumes. Irrigation load has helped lift November electricity demand +3.2% vs. the pcp (although we note that irrigation demand was low in November 2018).
Strong finish to 2019 for MEL and CEN
MEL and CEN have benefitted from the increased hydro storage but also regulatory transmission decisions which will see HVDC charges fall -36% from 1 April 2020. In addition, the deal that sees Transpower start work on relieving transmission constraints is a significant positive. We have lifted our MEL and CEN FY20 and FY21 EBITDAF forecasts between +2.3% and +4.4% each year.
Tilt Renewables (TLT) demonstrates infrastructure is hot
TLT has successfully sold its Snowtown 2 wind farm for A$1.07b, a very strong price that once again shows infrastructure investments are very popular at present. We see significant upside in TLT, as in our view the market has not fully priced in the Snowtown 2 sales price.
Figure 1. Summary company valuation metric
<table class="table table-striped">
<thead>
<tr>
<td rowspan="2" style="width: 1cm;">
&nbsp;
Ticker
</td>
<td rowspan="2" style="width: 1cm;">
&nbsp;
Price
</td>
<td rowspan="2" style="width: 35.45pt;">
Target
Price
</td>
<td rowspan="2" style="width: 35.45pt;">
Target
Return
</td>
<td rowspan="2" style="width: 2cm;">
&nbsp;
Rating
</td>
<td colspan="3" style="width: 92.7pt;">
FY20
</td>
<td style="width: 49.05pt;">
EBITDAF
</td>
</tr>
</thead>
<tbody>
<tr>
<td style="width: 42.5pt;">
EV/EBITDA
</td>
<td style="width: 21.9pt;">
PE
</td>
<td style="width: 28.3pt;">
Gr Yld*
</td>
<td style="width: 49.05pt;">
NZ$m
</td>
</tr>
<tr>
<td style="width: 1cm;">
CEN
</td>
<td style="width: 1cm;">
$7.23
</td>
<td style="width: 35.45pt;">
$8.15
</td>
<td style="width: 35.45pt;">
18.1%
</td>
<td style="width: 2cm;">
OUTPERFORM
</td>
<td style="width: 42.5pt;">
12.8
</td>
<td style="width: 21.9pt;">
20.1
</td>
<td style="width: 28.3pt;">
6.8%
</td>
<td style="width: 49.05pt;">
478
</td>
</tr>
<tr>
<td style="width: 1cm;">
GNE
</td>
<td style="width: 1cm;">
$3.03
</td>
<td style="width: 35.45pt;">
$3.23
</td>
<td style="width: 35.45pt;">
12.4%
</td>
<td style="width: 2cm;">
OUTPERFORM
</td>
<td style="width: 42.5pt;">
14.3
</td>
<td style="width: 21.9pt;">
28.7
</td>
<td style="width: 28.3pt;">
7.7%
</td>
<td style="width: 49.05pt;">
365
</td>
</tr>
<tr>
<td style="width: 1cm;">
MCY
</td>
<td style="width: 1cm;">
$4.92
</td>
<td style="width: 35.45pt;">
$4.62
</td>
<td style="width: 35.45pt;">
-2.8%
</td>
<td style="width: 2cm;">
NEUTRAL
</td>
<td style="width: 42.5pt;">
15.1
</td>
<td style="width: 21.9pt;">
26.9
</td>
<td style="width: 28.3pt;">
4.5%
</td>
<td style="width: 49.05pt;">
516
</td>
</tr>
<tr>
<td style="width: 1cm;">
MEL
</td>
<td style="width: 1cm;">
$5.00
</td>
<td style="width: 35.45pt;">
$4.25
</td>
<td style="width: 35.45pt;">
-10.7%
</td>
<td style="width: 2cm;">
NEUTRAL
</td>
<td style="width: 42.5pt;">
16.7
</td>
<td style="width: 21.9pt;">
25.4
</td>
<td style="width: 28.3pt;">
5.4%
</td>
<td style="width: 49.05pt;">
852
</td>
</tr>
<tr>
<td style="width: 1cm;">
TLT
</td>
<td style="width: 1cm;">
$3.37
</td>
<td style="width: 35.45pt;">
$3.70
</td>
<td style="width: 35.45pt;">
9.8%
</td>
<td style="width: 2cm;">
OUTPERFORM
</td>
<td style="width: 42.5pt;">
14.4
</td>
<td style="width: 21.9pt;">
18.2
</td>
<td style="width: 28.3pt;">
0.0%
</td>
<td style="width: 49.05pt;">
138
</td>
</tr>
<tr>
<td style="width: 1cm;">
TPW
</td>
<td style="width: 1cm;">
$7.25
</td>
<td style="width: 35.45pt;">
$7.75
</td>
<td style="width: 35.45pt;">
11.6%
</td>
<td style="width: 2cm;">
NEUTRAL
</td>
<td style="width: 42.5pt;">
14.3
</td>
<td style="width: 21.9pt;">
23.7
</td>
<td style="width: 28.3pt;">
6.5%
</td>
<td style="width: 49.05pt;">
203
</td>
</tr>
</tbody>
</table>
Source: Eikon, Forsyth Barr analysis *Includes any forecast special dividend
<div class="content-highlight">
Investment View
We continue to like the long-term outlook for the sector and maintain our view than NZAS will not be closing. Our preferred stocks are CEN, Genesis Energy (GNE) &amp; TLT (OUTPERFORM), whilst the other stocks, (Mercury) MCY, MEL &amp; (Trustpower) TPW are NEUTRAL.<a target="_blank">&nbsp;</a>
</div>
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185
Scott Anderson scott.anderson@forsythbarr.co.nz +64 4 914 2219

Power Points
MEL &amp; CEN Happy as Santa — December 2019
Meridian Energy (MEL) and Contact Energy (CEN) have both had a strong November 2019 for several reasons. First, record hydro inflows into the South Island catchments has replenished storage levels and set them up for the foreseeable future. Second, they have combined to get Transpower to start work on relieving lower South Island transmission constraints earlier than it otherwise would have. Third, Transpower’s HVDC charges are going to be lower than anticipated, providing an earnings tailwind in FY21 and beyond. We have lifted our MEL and CEN target prices +14cps and +12cps respectively.
Record breaking month for hydro generators
Over the past four weeks South Island hydro storage has almost doubled, increasing +1,770GWh to 3,492GWh. All of the South Island generators have benefitted. However, whilst wholesale electricity prices fell modestly (Benmore averaged $93/MWh in November 2019, -21% lower than October), $93/MWh is still a high price considering national lake storage is ~155% of average. Plant outages and the ongoing tight gas market have meant the ASX futures prices barely registered the lift in hydro storage volumes. Irrigation load has helped lift November electricity demand +3.2% vs. the pcp (although we note that irrigation demand was low in November 2018).
Strong finish to 2019 for MEL and CEN
MEL and CEN have benefitted from the increased hydro storage but also regulatory transmission decisions which will see HVDC charges fall -36% from 1 April 2020. In addition, the deal that sees Transpower start work on relieving transmission constraints is a significant positive. We have lifted our MEL and CEN FY20 and FY21 EBITDAF forecasts between +2.3% and +4.4% each year.
Tilt Renewables (TLT) demonstrates infrastructure is hot
TLT has successfully sold its Snowtown 2 wind farm for A$1.07b, a very strong price that once again shows infrastructure investments are very popular at present. We see significant upside in TLT, as in our view the market has not fully priced in the Snowtown 2 sales price.
Figure 1. Summary company valuation metric




&nbsp;
Ticker


&nbsp;
Price


Target
Price


Target
Return


&nbsp;
Rating


FY20


EBITDAF






EV/EBITDA


PE


Gr Yld*


NZ$m




CEN


$7.23


$8.15


18.1%


OUTPERFORM


12.8


20.1


6.8%


478




GNE


$3.03


$3.23


12.4%


OUTPERFORM


14.3


28.7


7.7%


365




MCY


$4.92


$4.62


-2.8%


NEUTRAL


15.1


26.9


4.5%


516




MEL


$5.00


$4.25


-10.7%


NEUTRAL


16.7


25.4


5.4%


852




TLT


$3.37


$3.70


9.8%


OUTPERFORM


14.4


18.2


0.0%


138




TPW


$7.25


$7.75


11.6%


NEUTRAL


14.3


23.7


6.5%


203




Source: Eikon, Forsyth Barr analysis *Includes any forecast special dividend

Investment View
We continue to like the long-term outlook for the sector and maintain our view than NZAS will not be closing. Our preferred stocks are CEN, Genesis Energy (GNE) &amp; TLT (OUTPERFORM), whilst the other stocks, (Mercury) MCY, MEL &amp; (Trustpower) TPW are NEUTRAL.&nbsp;

Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185
Scott Anderson scott.anderson@forsythbarr.co.nz +64 4 914 2219

Power Points: MEL & CEN Happy as Santa — December 2019