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>
September 2019—Powering Higher
Interest rates collapsing to new lows and electricity share prices surging to new highs were the main feature of August 2019. However, Trustpower (TPW) is proving to be a laggard and we believe offers the best value in the sector. In contrast, we believe Mercury (MCY) has gone too far, with its likely inclusion in the MSCI Index pushing it into the expensive category. We have downgraded MCY to UNDERPERFORM.
Falling interest rates turbocharges electricity share prices
Interest rates declined significantly in August 2019, with the 10-year swap rate falling -0.44% to a current figure of 1.19%. That resulted in most electricity share prices surging, led by MCY but closely followed by Contact Energy (CEN) and Meridian Energy (MEL), all of which have increased more than +17% since the end of July. In light of the further interest rate declines, we have reviewed our valuation metrics and lift all of the electricity target prices at least +1.5%, with TPW increasing the most, +6.7% to $8.00.
Wholesale electricity prices rise again
Electricity wholesale prices increased strongly at both OTA and BEN in August 2019. Prices at OTA averaged $135/MWh in August, up +17% on the prior month. National electricity demand increased +0.8% vs. the pcp, partially due to a colder August, but also the additional NZAS demand. Also impacting the wholesale electricity market was a -10% decline in hydro storage levels to 101% of average at month end, with CEN and Genesis Energy’s (GNE) South Island hydro storage well below average. ASX futures prices again drifted higher, with long-dated OTA ASX futures up +5% to $102/MWh.
Reporting season wrap-up — strong earnings
Whilst there were no earnings surprises from the four companies reporting FY19 results, it did confirm that FY19 was a record year as sector EBITDAF increased +7.4%. MEL led the way, lifting FY19 EBITDAF +26% to $838m. Dividend growth for the sector was again solid, with MEL’s stand-out result and CEN’s new dividend policy (following its de-leveraging) increasing the shareholder returns. We are not expecting FY20 to be as strong as FY19, with normalised hydrology and CEN’s and MCY’s asset sales reducing sector EBITDAF -5.0% — although that will still represent solid growth on FY18 with the elevated wholesale electricity prices filtering through to consumer segments.
Figure 1. Summary company valuation metric
<table class="table table-striped">
<thead>
<tr>
<td>
&nbsp;
</td>
<td></td>
<td>
Target
</td>
<td>
Target
</td>
<td></td>
<td>
EV/
</td>
<td colspan="3">
FY20
</td>
<td>
EBITDAF
</td>
</tr>
<tr>
<td>
Ticker
</td>
<td>
Price
</td>
<td>
Price
</td>
<td>
Return
</td>
<td>
Rating
</td>
<td colspan="2">
EBITDA(x)
</td>
<td>
Adj PE (x)
</td>
<td>
Gr Yld *
</td>
<td>
NZ$m
</td>
</tr>
</thead>
<tbody>
<tr>
<td>
CEN
</td>
<td>
$8.92
</td>
<td>
$8.22
</td>
<td>
-3.4%
</td>
<td>
NEUTRAL
</td>
<td colspan="2">
15.0
</td>
<td>
24.1
</td>
<td>
5.6%
</td>
<td>
488
</td>
</tr>
<tr>
<td>
GNE
</td>
<td>
$3.65
</td>
<td>
$3.28
</td>
<td>
-5.3%
</td>
<td>
NEUTRAL
</td>
<td colspan="2">
16.5
</td>
<td>
34.9
</td>
<td>
6.6%
</td>
<td>
367
</td>
</tr>
<tr>
<td>
MCY
</td>
<td>
$5.47
</td>
<td>
$4.45
</td>
<td>
-15.7%
</td>
<td>
UNDERPERFORM
</td>
<td colspan="2">
17.5
</td>
<td>
32.6
</td>
<td>
4.0%
</td>
<td>
488
</td>
</tr>
<tr>
<td>
MEL
</td>
<td>
$5.54
</td>
<td>
$4.20
</td>
<td>
-20.3%
</td>
<td>
UNDERPERFORM
</td>
<td colspan="2">
20.3
</td>
<td>
32.1
</td>
<td>
4.8%
</td>
<td>
769
</td>
</tr>
<tr>
<td>
TLT
</td>
<td>
$2.75
</td>
<td>
$2.50
</td>
<td>
-9.1%
</td>
<td>
NEUTRAL
</td>
<td colspan="2">
11.4
</td>
<td>
15.3
</td>
<td>
0.0%
</td>
<td>
146
</td>
</tr>
<tr>
<td>
TPW
</td>
<td>
$7.83
</td>
<td>
$8.00
</td>
<td>
6.5%
</td>
<td>
OUTPERFORM
</td>
<td colspan="2">
14.4
</td>
<td>
23.3
</td>
<td>
5.9%
</td>
<td>
209
</td>
</tr>
<tr>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
</tbody>
</table>
Source: Eikon, Forsyth Barr analysis, * Includes any forecast special dividend
<div class="content-highlight">
Investment View
We are positive on the long-term outlook for the sector. Whilst all of the electricity stocks are trading on record multiples, the low interest rate environment and weight of money looking for new high-yielding investments is likely to be supportive near-term.
</div>
Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185
&nbsp;Adam Lourie
adam.lourie@forsythbarr.co.nz
+64 4 914 2273

Power Points
September 2019—Powering Higher
Interest rates collapsing to new lows and electricity share prices surging to new highs were the main feature of August 2019. However, Trustpower (TPW) is proving to be a laggard and we believe offers the best value in the sector. In contrast, we believe Mercury (MCY) has gone too far, with its likely inclusion in the MSCI Index pushing it into the expensive category. We have downgraded MCY to UNDERPERFORM.
Falling interest rates turbocharges electricity share prices
Interest rates declined significantly in August 2019, with the 10-year swap rate falling -0.44% to a current figure of 1.19%. That resulted in most electricity share prices surging, led by MCY but closely followed by Contact Energy (CEN) and Meridian Energy (MEL), all of which have increased more than +17% since the end of July. In light of the further interest rate declines, we have reviewed our valuation metrics and lift all of the electricity target prices at least +1.5%, with TPW increasing the most, +6.7% to $8.00.
Wholesale electricity prices rise again
Electricity wholesale prices increased strongly at both OTA and BEN in August 2019. Prices at OTA averaged $135/MWh in August, up +17% on the prior month. National electricity demand increased +0.8% vs. the pcp, partially due to a colder August, but also the additional NZAS demand. Also impacting the wholesale electricity market was a -10% decline in hydro storage levels to 101% of average at month end, with CEN and Genesis Energy’s (GNE) South Island hydro storage well below average. ASX futures prices again drifted higher, with long-dated OTA ASX futures up +5% to $102/MWh.
Reporting season wrap-up — strong earnings
Whilst there were no earnings surprises from the four companies reporting FY19 results, it did confirm that FY19 was a record year as sector EBITDAF increased +7.4%. MEL led the way, lifting FY19 EBITDAF +26% to $838m. Dividend growth for the sector was again solid, with MEL’s stand-out result and CEN’s new dividend policy (following its de-leveraging) increasing the shareholder returns. We are not expecting FY20 to be as strong as FY19, with normalised hydrology and CEN’s and MCY’s asset sales reducing sector EBITDAF -5.0% — although that will still represent solid growth on FY18 with the elevated wholesale electricity prices filtering through to consumer segments.
Figure 1. Summary company valuation metric




&nbsp;



Target


Target



EV/


FY20


EBITDAF




Ticker


Price


Price


Return


Rating


EBITDA(x)


Adj PE (x)


Gr Yld *


NZ$m






CEN


$8.92


$8.22


-3.4%


NEUTRAL


15.0


24.1


5.6%


488




GNE


$3.65


$3.28


-5.3%


NEUTRAL


16.5


34.9


6.6%


367




MCY


$5.47


$4.45


-15.7%


UNDERPERFORM


17.5


32.6


4.0%


488




MEL


$5.54


$4.20


-20.3%


UNDERPERFORM


20.3


32.1


4.8%


769




TLT


$2.75


$2.50


-9.1%


NEUTRAL


11.4


15.3


0.0%


146




TPW


$7.83


$8.00


6.5%


OUTPERFORM


14.4


23.3


5.9%


209
















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

Investment View
We are positive on the long-term outlook for the sector. Whilst all of the electricity stocks are trading on record multiples, the low interest rate environment and weight of money looking for new high-yielding investments is likely to be supportive near-term.

Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185
&nbsp;Adam Lourie
adam.lourie@forsythbarr.co.nz
+64 4 914 2273

Power Points September 2019—Powering Higher

Trustpower Ltd

Power Points September 2019—Powering Higher