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<br>Prices Yield to Rising Interest Rates—Dec 2021</h2>
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<h3>Downward pressure on electricity share prices&nbsp;likely to continue through to the end of 2021 and into 2022</h3>
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<p>All NZX listed electricity stocks fell in November, with losses ranging from -1.7% (TPW) and -10.4% (GNE). The benchmark S&amp;P NZX/50 Index also fell -3.0%, somewhat softening the comparative performance. With the 10-yr swap rate flat in November, the average electricity spread did bounce off its record low of 2.7% at the end of October to 3.1% at the end of November, but that is still below the&nbsp;trendline&nbsp;of ~4.0%. In our view, the electricity sector is still expensive, both in isolation&nbsp;and when compared to&nbsp;2018, the last time interest rates were at this level. In our note&nbsp;Is Electricity Offering Value Again?&nbsp;we outline our revised market multiple valuation&nbsp;and adjust our target prices accordingly. The lofty valuations also come&nbsp;at a time where the electricity sector continues to experience continued regulatory risk, although it receive a small win in November with CEN and GNE largely exonerated of any blame for the August 9 blackouts. With the Electricity Authority's (EA)&nbsp;ongoing Wholesale Market Review looking like it will be a drawn out process, the regulatory risk is likely to hang over the sector for some time yet.</p>
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<h3>Record month for&nbsp;renewables&nbsp;leads to record low thermal generation&nbsp;</h3>
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<p>For a sector in need of a good news story&nbsp;it found it over&nbsp;the past two months in the form of&nbsp;renewable generation's share of total generation reaching a record in October of&nbsp;90.6%, and then beating this record in November with 91.1%. It comes at a good&nbsp;time with the recently concluded COP26 putting climate change, and the electricity sector's important role in combating it, into the spotlight once again. The high amount of renewable generation has forced down average wholesale prices to under NZ$100/MWh&nbsp;over the past three months, with&nbsp;Otahuhu&nbsp;averaging NZ$92/MWh&nbsp;in November.&nbsp;Thermal generation was just 6.2% of total generation (co-generation making up the remaining 2.7% of thermal-related generation), down from 12.0% in November 2020. November 2021 electricity demand was down -0.5% on the&nbsp;pcp, and is the sixth month in a row demand has been lower than the prior year, albeit the decline this month was less worse than the COVID-19 and irrigation demand impacted months of&nbsp;September and October. With hydro lakes beginning December still well above average at 124% of average, thermal generation's&nbsp;low share of total generation is likely to continue as electricity demand declines during the summer months.</p>
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Power Points Prices Yield to Rising Interest Rates—Dec 2021


Downward pressure on electricity share prices&nbsp;likely to continue through to the end of 2021 and into 2022


All NZX listed electricity stocks fell in November, with losses ranging from -1.7% (TPW) and -10.4% (GNE). The benchmark S&amp;P NZX/50 Index also fell -3.0%, somewhat softening the comparative performance. With the 10-yr swap rate flat in November, the average electricity spread did bounce off its record low of 2.7% at the end of October to 3.1% at the end of November, but that is still below the&nbsp;trendline&nbsp;of ~4.0%. In our view, the electricity sector is still expensive, both in isolation&nbsp;and when compared to&nbsp;2018, the last time interest rates were at this level. In our note&nbsp;Is Electricity Offering Value Again?&nbsp;we outline our revised market multiple valuation&nbsp;and adjust our target prices accordingly. The lofty valuations also come&nbsp;at a time where the electricity sector continues to experience continued regulatory risk, although it receive a small win in November with CEN and GNE largely exonerated of any blame for the August 9 blackouts. With the Electricity Authority's (EA)&nbsp;ongoing Wholesale Market Review looking like it will be a drawn out process, the regulatory risk is likely to hang over the sector for some time yet.



Record month for&nbsp;renewables&nbsp;leads to record low thermal generation&nbsp;


For a sector in need of a good news story&nbsp;it found it over&nbsp;the past two months in the form of&nbsp;renewable generation's share of total generation reaching a record in October of&nbsp;90.6%, and then beating this record in November with 91.1%. It comes at a good&nbsp;time with the recently concluded COP26 putting climate change, and the electricity sector's important role in combating it, into the spotlight once again. The high amount of renewable generation has forced down average wholesale prices to under NZ$100/MWh&nbsp;over the past three months, with&nbsp;Otahuhu&nbsp;averaging NZ$92/MWh&nbsp;in November.&nbsp;Thermal generation was just 6.2% of total generation (co-generation making up the remaining 2.7% of thermal-related generation), down from 12.0% in November 2020. November 2021 electricity demand was down -0.5% on the&nbsp;pcp, and is the sixth month in a row demand has been lower than the prior year, albeit the decline this month was less worse than the COVID-19 and irrigation demand impacted months of&nbsp;September and October. With hydro lakes beginning December still well above average at 124% of average, thermal generation's&nbsp;low share of total generation is likely to continue as electricity demand declines during the summer months.


Power Points: Prices Yield to Rising Interest Rates—Dec 2021

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Power Points: Prices Yield to Rising Interest Rates—Dec 2021