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>
Silver Linings — March 2020
February 2020 was an interesting time for both the wholesale electricity market and the electricity stocks themselves. The combined effect of COVID-19 and rekindled NZAS closure fears has resulted in electricity stocks underperforming the market, creating buying opportunities. Our preferred stocks are Contact Energy (CEN), Genesis Energy (GNE) and Trustpower (TPW) which we are upgrading to OUTPERFORM. The wholesale electricity market was very volatile in February due to HVDC constraints, with the South Island prices less than half those in the North Island.
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col> <col> <col span="2"> <col> <col> <col></colgroup>
<tbody>
<tr>
<td rowspan="2" style="width: 48pt;">Company</td>
<td rowspan="2" style="width: 48pt;">Price&nbsp;</td>
<td rowspan="2" style="width: 48pt;">Target Price</td>
<td rowspan="2" style="width: 40.2pt;">Target Return</td>
<td rowspan="2" style="width: 69.6pt;">Rating</td>
<td rowspan="2" style="width: 51.6pt;">EV/EBITDA</td>
<td rowspan="2" style="width: 35.4pt;">PE</td>
<td rowspan="2" style="width: 43.2pt;">FY20 Gr Yld</td>
<td rowspan="2" style="width: 42.6pt;">EBITDAF NZ$m</td>
<td style="width: 42.6pt;"></td>
<td colspan="2" style="width: 97.2pt;">Movements</td>
<td style="width: 48pt;"></td>
</tr>
<tr>
<td>EBITDAF</td>
<td>Chg</td>
<td>Target Price</td>
<td>Rating</td>
</tr>
<tr>
<td>CEN</td>
<td>$6.75</td>
<td>$8.00</td>
<td>24.3%</td>
<td>OUTPERFORM</td>
<td>13.0&nbsp;</td>
<td>20.8</td>
<td>7.1%</td>
<td>441</td>
<td>$0m</td>
<td>0.0%</td>
<td>$0.00</td>
<td>-</td>
</tr>
<tr>
<td>GNE</td>
<td>$3.13</td>
<td>$3.15</td>
<td>6.4%</td>
<td>OUTPERFORM</td>
<td>14.6</td>
<td>28</td>
<td>7.6%</td>
<td>366</td>
<td>$0m</td>
<td>0.0%</td>
<td>$0.00</td>
<td>-</td>
</tr>
<tr>
<td>MCY</td>
<td>$4.80</td>
<td>$4.60</td>
<td>-0.8%</td>
<td>NEUTRAL</td>
<td>15.1</td>
<td>27.7</td>
<td>4.6%</td>
<td>501</td>
<td>$0m</td>
<td>0.0%</td>
<td>$0.00</td>
<td>-</td>
</tr>
<tr>
<td>MEL</td>
<td>$4.81</td>
<td>$4.40</td>
<td>-4.1%</td>
<td>NEUTRAL</td>
<td>16.1</td>
<td>24.6</td>
<td>5.6%</td>
<td>864</td>
<td>$0m</td>
<td>0.0%</td>
<td>$0.00</td>
<td>-</td>
</tr>
<tr>
<td>TLT</td>
<td>$3.26</td>
<td>$3.70</td>
<td>13.5%</td>
<td>OUTPERFORM</td>
<td>13.9</td>
<td>17.5</td>
<td>0.0%</td>
<td>139</td>
<td>$0m</td>
<td>0.0%</td>
<td>$0.00</td>
<td>-</td>
</tr>
<tr>
<td>TPW</td>
<td>$6.60</td>
<td>$7.70</td>
<td>21.8%</td>
<td>OUTPERFORM</td>
<td>14.4</td>
<td>24.5</td>
<td>7.2%</td>
<td>187</td>
<td>-$16m</td>
<td>-7.7%</td>
<td>-$0.05</td>
<td>▲</td>
</tr>
</tbody>
</table>
COVID-19 and&nbsp;NZAS&nbsp;fear create buying opportunities
In the week beginning 24 February, COVID-19 and NZAS fears combined to cause a -4% to -13% decline in the generator/retailer share prices. For a sector with very little earnings risk to COVID-19 and with the 10-year Government bond rate falling ~-0.35%, the electricity stocks look more attractive from a value perspective than they did pre-COVID-19. In addition, the NZAS closure fears that have re-appeared are unfounded in our view. The losses reported by NZAS and the Pacific Aluminium division are due to high intercompany alumina prices and Rio Tinto is still in discussions with the sector and regulators, so the fact that no deal has been signed means little at this point. We maintain our view that NZAS is highly unlikely to close. In a carbon-constrained world, closing NZAS would be a mistake. We discuss these two points in further detail in our note Still Calling the Smelter's Bluff.
Wholesale electricity market volatile in February as&nbsp;HVDC&nbsp;outages roll on
The inter-island HVDC link was constrained to varying degrees all February. The constraints, combined with heavy South Island rain, resulted in a big inter-island wholesale electricity price split and volatile prices throughout the month. Benmore prices averaged $38/MWh vs. $81/MWh at Otahuhu, with daily average Otahuhu prices varying between $27/MWh and $148/MWh. Electricity demand was up +1.2% despite NZAS demand slipping -4.2%. Lake storage levels remain above average (116% at month end) and means there's unlikely to be any issues with low lakes this winter. Work on the HVDC link is expected to conclude on 9 April.
Upgrading&nbsp;Trustpower&nbsp;(TPW) despite guidance downgrade
We are upgrading&nbsp;TPW&nbsp;to OUTPERFORM from NEUTRAL. Whilst the -~$17.5m FY20&nbsp;EBITDAF&nbsp;guidance range downgrade in February was disappointing, it is for one-off (mainly low generation volumes) reasons. The rating upgrade is due to&nbsp;TPW's&nbsp;material share price decline (-14%) over the past four weeks with the lower guidance having only a -5cps impact on our target price.
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185&nbsp;
Scott Anderson scott.anderson@forsythbarr.co.nz +64 4 914 2219

Power Points
Silver Linings — March 2020
February 2020 was an interesting time for both the wholesale electricity market and the electricity stocks themselves. The combined effect of COVID-19 and rekindled NZAS closure fears has resulted in electricity stocks underperforming the market, creating buying opportunities. Our preferred stocks are Contact Energy (CEN), Genesis Energy (GNE) and Trustpower (TPW) which we are upgrading to OUTPERFORM. The wholesale electricity market was very volatile in February due to HVDC constraints, with the South Island prices less than half those in the North Island.
           


Company
Price&nbsp;
Target Price
Target Return
Rating
EV/EBITDA
PE
FY20 Gr Yld
EBITDAF NZ$m

Movements



EBITDAF
Chg
Target Price
Rating


CEN
$6.75
$8.00
24.3%
OUTPERFORM
13.0&nbsp;
20.8
7.1%
441
$0m
0.0%
$0.00
-


GNE
$3.13
$3.15
6.4%
OUTPERFORM
14.6
28
7.6%
366
$0m
0.0%
$0.00
-


MCY
$4.80
$4.60
-0.8%
NEUTRAL
15.1
27.7
4.6%
501
$0m
0.0%
$0.00
-


MEL
$4.81
$4.40
-4.1%
NEUTRAL
16.1
24.6
5.6%
864
$0m
0.0%
$0.00
-


TLT
$3.26
$3.70
13.5%
OUTPERFORM
13.9
17.5
0.0%
139
$0m
0.0%
$0.00
-


TPW
$6.60
$7.70
21.8%
OUTPERFORM
14.4
24.5
7.2%
187
-$16m
-7.7%
-$0.05
▲



COVID-19 and&nbsp;NZAS&nbsp;fear create buying opportunities
In the week beginning 24 February, COVID-19 and NZAS fears combined to cause a -4% to -13% decline in the generator/retailer share prices. For a sector with very little earnings risk to COVID-19 and with the 10-year Government bond rate falling ~-0.35%, the electricity stocks look more attractive from a value perspective than they did pre-COVID-19. In addition, the NZAS closure fears that have re-appeared are unfounded in our view. The losses reported by NZAS and the Pacific Aluminium division are due to high intercompany alumina prices and Rio Tinto is still in discussions with the sector and regulators, so the fact that no deal has been signed means little at this point. We maintain our view that NZAS is highly unlikely to close. In a carbon-constrained world, closing NZAS would be a mistake. We discuss these two points in further detail in our note Still Calling the Smelter's Bluff.
Wholesale electricity market volatile in February as&nbsp;HVDC&nbsp;outages roll on
The inter-island HVDC link was constrained to varying degrees all February. The constraints, combined with heavy South Island rain, resulted in a big inter-island wholesale electricity price split and volatile prices throughout the month. Benmore prices averaged $38/MWh vs. $81/MWh at Otahuhu, with daily average Otahuhu prices varying between $27/MWh and $148/MWh. Electricity demand was up +1.2% despite NZAS demand slipping -4.2%. Lake storage levels remain above average (116% at month end) and means there's unlikely to be any issues with low lakes this winter. Work on the HVDC link is expected to conclude on 9 April.
Upgrading&nbsp;Trustpower&nbsp;(TPW) despite guidance downgrade
We are upgrading&nbsp;TPW&nbsp;to OUTPERFORM from NEUTRAL. Whilst the -~$17.5m FY20&nbsp;EBITDAF&nbsp;guidance range downgrade in February was disappointing, it is for one-off (mainly low generation volumes) reasons. The rating upgrade is due to&nbsp;TPW's&nbsp;material share price decline (-14%) over the past four weeks with the lower guidance having only a -5cps impact on our target price.
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185&nbsp;
Scott Anderson scott.anderson@forsythbarr.co.nz +64 4 914 2219

Power Points: Silver Linings — March 2020