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>Volatile Start to 2021 — February 2021</h2>
<p>&nbsp;</p>
<p>2021 has started with a bang with huge ETF induced share price movements, Rio Tinto (RIO) announcing NZAS will stay open for longer, the Climate Change Commission (CCC) releasing its draft report, a flurry of quarterly reports and hydro conditions starting to tighten. 2021 is set to be an&nbsp;eventful year, with ETF influence likely to continue and the CCC finalising its report in May 2021 before the politicians have their say at the end of the year.&nbsp;And who knows what will happen with hydrology. We continue to prefer Genesis Energy (GNE) as it offers good value, a good dividend yield and we believe its decarbonisation strategy will payoff&nbsp;in time. At the other end of the spectrum, Mercury (MCY) and Meridian (MEL) remain expensive.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/186/657/original/image_94310271721612396547368.png?1612396552" class="editor-image img-responsive" data-smartkarma-image-id="186657"></figure>
<h3>ETF flows cause huge share price volatility</h3>
<p>MEL and MCY have long&nbsp;benefitted&nbsp;from being part of the MSCI, providing a steady demand for their shares. December and January saw the attention firmly switch to the&nbsp;iShares&nbsp;Global Clean Energy&nbsp;ETFs, of which MEL and Contact Energy (CEN) are members. January ended up being a volatile month for these stocks, rising +26% and +20% respectively early in the month, before ending January down -4% and -5%. Whilst the S&amp;P Global Clean Energy Index&nbsp;appears likely to undergo changes in April 2021, we expect&nbsp;ETFs&nbsp;to continue to be a strong, volatile influence on the electricity stocks.</p>
<h3>NZAS and CCC announcements generally positive for the sector</h3>
<p>RIO and the CCC provided January's key announcements. NZAS staying open until at least 2024 provides near-term certainty and we expect CEN and MEL to shortly commit to building new generation. With NZAS a very profitable smelter (we estimate ~NZ$200m EBITDA less capex) we expect RIO will seek an extension to its contract. The CCC announcement confirmed that electricity is the fuel of choice to decarbonise the economy, which will support wholesale electricity prices, the sector’s key value driver.</p>
<h3>Wholesale market tightens, resulting in firming wholesale electricity prices</h3>
<p>Wholesale electricity prices firmed in January due to a tightening hydro situation (January 2021 inflows were 74% of average) and the ongoing gas issues limiting backup thermal generation. The average Otahuhu (OTA) price was NZ$137/MWh, up +14% on December 2020. The NZAS decision and hydro situation has also seen a big increase in electricity futures prices. The short-dated OTA price increased +14% to NZ$159/MWh and the long-dated price increased +20% to NZ$122/MWh on December 2020. We expect these prices to benefit sector profitability in the medium-term, and they are also sending a strong signal that new generation is required. MEL is currently most exposed to a dry 2021 and MCY stands to benefit the most if North Island hydro conditions remain average.</p>
<p><strong>Andrew Harvey-Green</strong><br>andrew.harvey-green@forsythbarr.co.nz<br>+64 4 495 8185&nbsp;</p>
<p><strong>Scott Anderson</strong><br>scott.anderson@forsythbarr.co.nz<br>+64 4 914 2219</p>

Power Points Volatile Start to 2021 — February 2021
&nbsp;
2021 has started with a bang with huge ETF induced share price movements, Rio Tinto (RIO) announcing NZAS will stay open for longer, the Climate Change Commission (CCC) releasing its draft report, a flurry of quarterly reports and hydro conditions starting to tighten. 2021 is set to be an&nbsp;eventful year, with ETF influence likely to continue and the CCC finalising its report in May 2021 before the politicians have their say at the end of the year.&nbsp;And who knows what will happen with hydrology. We continue to prefer Genesis Energy (GNE) as it offers good value, a good dividend yield and we believe its decarbonisation strategy will payoff&nbsp;in time. At the other end of the spectrum, Mercury (MCY) and Meridian (MEL) remain expensive.

ETF flows cause huge share price volatility
MEL and MCY have long&nbsp;benefitted&nbsp;from being part of the MSCI, providing a steady demand for their shares. December and January saw the attention firmly switch to the&nbsp;iShares&nbsp;Global Clean Energy&nbsp;ETFs, of which MEL and Contact Energy (CEN) are members. January ended up being a volatile month for these stocks, rising +26% and +20% respectively early in the month, before ending January down -4% and -5%. Whilst the S&amp;P Global Clean Energy Index&nbsp;appears likely to undergo changes in April 2021, we expect&nbsp;ETFs&nbsp;to continue to be a strong, volatile influence on the electricity stocks.
NZAS and CCC announcements generally positive for the sector
RIO and the CCC provided January's key announcements. NZAS staying open until at least 2024 provides near-term certainty and we expect CEN and MEL to shortly commit to building new generation. With NZAS a very profitable smelter (we estimate ~NZ$200m EBITDA less capex) we expect RIO will seek an extension to its contract. The CCC announcement confirmed that electricity is the fuel of choice to decarbonise the economy, which will support wholesale electricity prices, the sector’s key value driver.
Wholesale market tightens, resulting in firming wholesale electricity prices
Wholesale electricity prices firmed in January due to a tightening hydro situation (January 2021 inflows were 74% of average) and the ongoing gas issues limiting backup thermal generation. The average Otahuhu (OTA) price was NZ$137/MWh, up +14% on December 2020. The NZAS decision and hydro situation has also seen a big increase in electricity futures prices. The short-dated OTA price increased +14% to NZ$159/MWh and the long-dated price increased +20% to NZ$122/MWh on December 2020. We expect these prices to benefit sector profitability in the medium-term, and they are also sending a strong signal that new generation is required. MEL is currently most exposed to a dry 2021 and MCY stands to benefit the most if North Island hydro conditions remain average.
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: Volatile Start to 2021 — February 2021