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>Power Points</h2>
October 2019 — ASX Futures Prices Power On Up
It was another positive month for the electricity sector, with the Electricity Price Review (EPR) containing no big surprises, ASX futures prices firming to record levels and share prices once again outperforming the S&amp;P/NZX50. Wholesale electricity prices were again firm and rose noticeably after month end as hydro lakes continued to fall and a cold snap came over the country.
EPR outcomes lower regulatory risk, for now
The long-awaited EPR contained few surprises. As expected prompt payment discounts, win-backs and the low fixed charge tariffs are to be phased out. There is also expected to be stricter rules on futures market making. The Government is expecting the Electricity Authority (EA) to implement most of the recommendations and plans to review the implementation in two to three years.
Wholesale electricity prices firm as South Island hydro lakes fall
The average OTA price in September was $119/MWh, flat on the pcp, but since month end prices have been above $200/MWh, with hydro lake storage levels now 83% of average due to low South Island storage. The ASX futures prices have risen to record levels, with long-dated BEN prices above $90/MWh for the first time and OTA prices above $102/MWh. Electricity demand was again slightly up on the pcp (+1.2%, +0.8% excluding NZAS demand). We expect Meridian Energy (MEL) has had another good month; however, the outlook is less certain given the lower lake levels. Contact Energy (CEN) has had a more difficult month, with record low hydro generation for September.
MSCI Index changes on a knife-edge for CEN
MSCI Index changes will be set based on prices in the last two weeks of October. At this stage, we expect Mercury (MCY) will enter the MSCI Index. There is a good chance that CEN will also enter the Index, but that requires the number of constituent stock to increase (which we believe is a little more likely than not) and for CEN to not underperform Fletcher Building (FBU) in the coming weeks. All will be revealed on Friday 8 November.
Figure 1. Summary company valuation metric
<table class="table table-striped">
<tbody>
<tr>
<td>Ticker</td>
<td>Price</td>
<td>Target Price</td>
<td>Target Return</td>
<td>Rating</td>
<td>EV/ EBITDA(x)</td>
<td>FY20 Adj PE(x)</td>
<td>Gr Yld*</td>
<td>EBITDAF NZ$m</td>
</tr>
<tr>
<td>CEN</td>
<td>$8.72&nbsp;</td>
<td>$8.22&nbsp;</td>
<td>-1.3%</td>
<td>NEUTRAL</td>
<td>14.7</td>
<td>23.5</td>
<td>5.7%</td>
<td>488</td>
</tr>
<tr>
<td>GNE</td>
<td>$3.50&nbsp;</td>
<td>$3.28&nbsp;</td>
<td>-1.3%</td>
<td>NEUTRAL</td>
<td>15.9</td>
<td>33.4</td>
<td>6.9%</td>
<td>367</td>
</tr>
<tr>
<td>MCY</td>
<td>$5.40&nbsp;</td>
<td>$4.45&nbsp;</td>
<td>-14.7%</td>
<td>UNDERPERFORM</td>
<td>17.3</td>
<td>32.2</td>
<td>4.1%</td>
<td>488</td>
</tr>
<tr>
<td>MEL</td>
<td>$5.27&nbsp;</td>
<td>$4.20&nbsp;</td>
<td>-16.2%</td>
<td>UNDERPERFORM</td>
<td>19.4</td>
<td>30.5</td>
<td>5.1%</td>
<td>769</td>
</tr>
<tr>
<td>TLT</td>
<td>$2.84&nbsp;</td>
<td>$2.99&nbsp;</td>
<td>5.4%</td>
<td>OUTPERFORM</td>
<td>11.8</td>
<td>15.9</td>
<td>0.0%</td>
<td>145</td>
</tr>
<tr>
<td>TPW</td>
<td>$8.23&nbsp;</td>
<td>$8.00&nbsp;</td>
<td>1.4%</td>
<td>OUTPERFORM</td>
<td>15.0</td>
<td>24.5</td>
<td>5.6%</td>
<td>209</td>
</tr>
</tbody>
</table>
Source: Eikon, Forsyth Barr&nbsp; analysis, * Includes any forecast special dividend
<div class="content-highlight">
Investment View
We are positive on the long-term outlook for the sector. However, all of the electricity stocks are trading on record multiples, and any change in the interest rate environment is likely to impact on share prices. If interest rates stay low, we expect continued support for the sector.&nbsp;
</div>
Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185

Power Points
October 2019 — ASX Futures Prices Power On Up
It was another positive month for the electricity sector, with the Electricity Price Review (EPR) containing no big surprises, ASX futures prices firming to record levels and share prices once again outperforming the S&amp;P/NZX50. Wholesale electricity prices were again firm and rose noticeably after month end as hydro lakes continued to fall and a cold snap came over the country.
EPR outcomes lower regulatory risk, for now
The long-awaited EPR contained few surprises. As expected prompt payment discounts, win-backs and the low fixed charge tariffs are to be phased out. There is also expected to be stricter rules on futures market making. The Government is expecting the Electricity Authority (EA) to implement most of the recommendations and plans to review the implementation in two to three years.
Wholesale electricity prices firm as South Island hydro lakes fall
The average OTA price in September was $119/MWh, flat on the pcp, but since month end prices have been above $200/MWh, with hydro lake storage levels now 83% of average due to low South Island storage. The ASX futures prices have risen to record levels, with long-dated BEN prices above $90/MWh for the first time and OTA prices above $102/MWh. Electricity demand was again slightly up on the pcp (+1.2%, +0.8% excluding NZAS demand). We expect Meridian Energy (MEL) has had another good month; however, the outlook is less certain given the lower lake levels. Contact Energy (CEN) has had a more difficult month, with record low hydro generation for September.
MSCI Index changes on a knife-edge for CEN
MSCI Index changes will be set based on prices in the last two weeks of October. At this stage, we expect Mercury (MCY) will enter the MSCI Index. There is a good chance that CEN will also enter the Index, but that requires the number of constituent stock to increase (which we believe is a little more likely than not) and for CEN to not underperform Fletcher Building (FBU) in the coming weeks. All will be revealed on Friday 8 November.
Figure 1. Summary company valuation metric



Ticker
Price
Target Price
Target Return
Rating
EV/ EBITDA(x)
FY20 Adj PE(x)
Gr Yld*
EBITDAF NZ$m


CEN
$8.72&nbsp;
$8.22&nbsp;
-1.3%
NEUTRAL
14.7
23.5
5.7%
488


GNE
$3.50&nbsp;
$3.28&nbsp;
-1.3%
NEUTRAL
15.9
33.4
6.9%
367


MCY
$5.40&nbsp;
$4.45&nbsp;
-14.7%
UNDERPERFORM
17.3
32.2
4.1%
488


MEL
$5.27&nbsp;
$4.20&nbsp;
-16.2%
UNDERPERFORM
19.4
30.5
5.1%
769


TLT
$2.84&nbsp;
$2.99&nbsp;
5.4%
OUTPERFORM
11.8
15.9
0.0%
145


TPW
$8.23&nbsp;
$8.00&nbsp;
1.4%
OUTPERFORM
15.0
24.5
5.6%
209



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

Investment View
We are positive on the long-term outlook for the sector. However, all of the electricity stocks are trading on record multiples, and any change in the interest rate environment is likely to impact on share prices. If interest rates stay low, we expect continued support for the sector.&nbsp;

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

Power Points: October 2019 — ASX Futures Prices Power On Up