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>Waiting on RIO — October 2020</h2>
<p></p>
<div id="m_5659593925640314424ijseatd-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2">
<p>Increasingly positive signals throughout September that New Zealand Aluminium Smelter (NZAS) is more likely to stay open resulted in a strong month for the sector, with all of the electricity stocks outperforming the S&amp;P NZX50 Index. We still see potential upside of ~+15% for the sector as a whole if NZAS remains open for longer on the basis of higher and de-risked dividends. In particular Genesis Energy (GNE) and Contact Energy (CEN) have the greatest upside potential and these are our preferred electricity stocks, with GNE upgraded to OUTPERFORM. Meridian Energy (MEL) has more limited dividend upside and we are downgrading its rating to NEUTRAL.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/163/802/original/image_60946613221602030131128.png?1602030134" class="editor-image img-responsive" data-smartkarma-image-id="163802"></figure>
</div>
<div>
<h3>Target price changes reflect upside potential from NZAS staying open for longer (as well as forecast changes)</h3>
</div>
<div id="m_5659593925640314424intrej">
<p>Our revised target prices assume a 50% chance that NZAS remains open and reflect upside potential from dividend forecast increases (relative to current estimates based on NZAS closing). CEN and GNE are the main beneficiaries (target prices up +8% and +13% respectively) as the dividends from those companies will increase the most if NZAS stays open vs. our current expectations. MEL and Mercury (MCY) benefit the least. The significant increase in Trustpower's (TPW) target price is due to cost of capital changes - these changes have already been made to the other electricity stocks.</p>
</div>
<div>
<h3>CEN the only generator with above average hydro generation in the September 2020 quarter</h3>
</div>
<div id="m_5659593925640314424ieehgr">
<p>Driving our FY21 EBITDAF forecast changes has been September 2020 quarter generation. The quarter has been characterised by low hydro generation volumes for all generators except CEN. Below average hydro generation has already resulted in MCY lowering FY21 guidance -NZ$10m and is the main reason for the -NZ$46m cut to our MEL FY21 forecast.&nbsp;</p>
</div>
<div>
<h3>Record wind month in September</h3>
</div>
<div id="m_5659593925640314424i4xe8t">
<p>In the wholesale electricity market, wind generation hit a record 208GWh. Hydro generation remained low, albeit heavy rain through the month has led to an improvement in hydro storage levels to ~93% of average from ~61% at the start of the month. Wholesale prices increased over the month, with Otahuhu (OTA) prices up +17% to average NZ$138/MWh and underlying September electricity demand was strong, up +1.1% on September 2019 despite NZAS demand declining -5.7% (due to potline 4 being offline).&nbsp;</p>
</div>
<div>
<h3>Parties release energy policies</h3>
</div>
<div id="m_5659593925640314424iaq6y6">
<p>All of the major political parties have released energy policies. The policy that garnered the most attention was Labour's (NZAS) policy which resulted in a significant boost to the market. We have summarised the key energy related polices. Whilst policies supporting NZAS staying open for longer is a positive for the sector, we do not view Labour's policy of 100% renewable electricity by 2030 in the same light, as to achieve that goal will bring back regulatory uncertainty into the sector.</p>
</div>
<div>
<div>
<div><strong>Andrew Harvey-Green</strong></div>
<div><a href="mailto:andrew.harvey-green@forsythbarr.co.nz" target="_blank" rel="noopener">andrew.harvey-green@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 8185</div>
<div></div>
</div>
</div>
<div>
<div>
<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
</div>
</div>

Power Points Waiting on RIO — October 2020


Increasingly positive signals throughout September that New Zealand Aluminium Smelter (NZAS) is more likely to stay open resulted in a strong month for the sector, with all of the electricity stocks outperforming the S&amp;P NZX50 Index. We still see potential upside of ~+15% for the sector as a whole if NZAS remains open for longer on the basis of higher and de-risked dividends. In particular Genesis Energy (GNE) and Contact Energy (CEN) have the greatest upside potential and these are our preferred electricity stocks, with GNE upgraded to OUTPERFORM. Meridian Energy (MEL) has more limited dividend upside and we are downgrading its rating to NEUTRAL.



Target price changes reflect upside potential from NZAS staying open for longer (as well as forecast changes)


Our revised target prices assume a 50% chance that NZAS remains open and reflect upside potential from dividend forecast increases (relative to current estimates based on NZAS closing). CEN and GNE are the main beneficiaries (target prices up +8% and +13% respectively) as the dividends from those companies will increase the most if NZAS stays open vs. our current expectations. MEL and Mercury (MCY) benefit the least. The significant increase in Trustpower's (TPW) target price is due to cost of capital changes - these changes have already been made to the other electricity stocks.


CEN the only generator with above average hydro generation in the September 2020 quarter


Driving our FY21 EBITDAF forecast changes has been September 2020 quarter generation. The quarter has been characterised by low hydro generation volumes for all generators except CEN. Below average hydro generation has already resulted in MCY lowering FY21 guidance -NZ$10m and is the main reason for the -NZ$46m cut to our MEL FY21 forecast.&nbsp;


Record wind month in September


In the wholesale electricity market, wind generation hit a record 208GWh. Hydro generation remained low, albeit heavy rain through the month has led to an improvement in hydro storage levels to ~93% of average from ~61% at the start of the month. Wholesale prices increased over the month, with Otahuhu (OTA) prices up +17% to average NZ$138/MWh and underlying September electricity demand was strong, up +1.1% on September 2019 despite NZAS demand declining -5.7% (due to potline 4 being offline).&nbsp;


Parties release energy policies


All of the major political parties have released energy policies. The policy that garnered the most attention was Labour's (NZAS) policy which resulted in a significant boost to the market. We have summarised the key energy related polices. Whilst policies supporting NZAS staying open for longer is a positive for the sector, we do not view Labour's policy of 100% renewable electricity by 2030 in the same light, as to achieve that goal will bring back regulatory uncertainty into the sector.



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





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Power Points: Waiting on RIO — October 2020