Leading Independent Investment Research, Morningstar, Inc.

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Leading Independent Investment Research

Morningstar, Inc.

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Thematic (Sector/Industry)

New Zealand's vertically integrated electricity generator/retailers, or "gentailers", are high-quality businesses. The most attractive at present is <a href="https://www.smartkarma.com/entities/13136" target="_blank" data-smartkarma-citation="entities:13136:1">Contact Energy Ltd (CEN NZ)</a>, which is cheaper than <a href="https://www.smartkarma.com/entities/4327" target="_blank" data-smartkarma-citation="entities:4327:1">Meridian Energy Ltd (MEL NZ)</a> and <a href="https://www.smartkarma.com/entities/9933" target="_blank" data-smartkarma-citation="entities:9933:1">Mercury NZ Ltd (MCY NZ)</a>, lower-risk than <a href="https://www.smartkarma.com/entities/4227" target="_blank" data-smartkarma-citation="entities:4227:1">Genesis Energy Ltd (GNE NZ)</a>, and better-quality than <a href="https://www.smartkarma.com/entities/11489" target="_blank" data-smartkarma-citation="entities:11489:1">Trustpower Ltd (TPW NZ)</a>, in our opinion. While the near-term outlook is depressed by generation oversupply and intense retail competition, Contact should increase earnings on cost reductions, changes to transmission pricing, and the eventual recovery of the wholesale price. It trades on a low EBITDA multiple, and one that's based on current depressed earnings. We expect the discount to our fair value estimate to close as earnings improve, potentially aided by an expansion of the firm's EBITDA multiple towards peers. In the meantime, investors receive a relatively attractive dividend yield of around 5%, with material upside in coming years, predominantly from a higher dividend payout ratio. We believe the market is too focused on soft near-term fundamentals, providing a good opportunity for patient investors.Analysts: Adrian Atkins and Angus Hewitt

New Zealand's vertically integrated electricity generator/retailers, or "gentailers", are high-quality businesses. The most attractive at present is Contact Energy Ltd (CEN NZ), which is cheaper than Meridian Energy Ltd (MEL NZ) and Mercury NZ Ltd (MCY NZ), lower-risk than Genesis Energy Ltd (GNE NZ), and better-quality than Trustpower Ltd (TPW NZ), in our opinion. While the near-term outlook is depressed by generation oversupply and intense retail competition, Contact should increase earnings on cost reductions, changes to transmission pricing, and the eventual recovery of the wholesale price. It trades on a low EBITDA multiple, and one that's based on current depressed earnings. We expect the discount to our fair value estimate to close as earnings improve, potentially aided by an expansion of the firm's EBITDA multiple towards peers. In the meantime, investors receive a relatively attractive dividend yield of around 5%, with material upside in coming years, predominantly from a higher dividend payout ratio. We believe the market is too focused on soft near-term fundamentals, providing a good opportunity for patient investors.Analysts: Adrian Atkins and Angus Hewitt

Don't Be Shortsighted on New Zealand's Oversupplied Energy Market

Equity Bottom-Up

Contact Energy's first-half fiscal 2017 result was in line with expectations, with EBITDA up 3% to NZD 261 million and net income up 12% to NZD 82 million. However, January operating statistics, also released today, were strong and suggest EBITDA for the financial year to date (seven months) is up around 5%. We make minor upgrades to our forecasts, and increase our fair value estimate by 4% to NZD 5.80 per share.At the current price of NZD 4.80, we believe Contact is attractive, offering a 5.4% mostly imputed dividend yield. Net debt/EBITDA should fall to comfortable levels this financial year as earnings rise and as surplus free cash flow is used to reduce debt, likely allowing dividends to increase from fiscal 2018 onwards. Further adding to the appeal for investors, imputation should steadily increase to 100% over the next few years. There is no change to our opinion that Contact is a high-quality company, warranting a narrow economic moat rating.Analyst: Adrian Atkins

Contact Energy's first-half fiscal 2017 result was in line with expectations, with EBITDA up 3% to NZD 261 million and net income up 12% to NZD 82 million. However, January operating statistics, also released today, were strong and suggest EBITDA for the financial year to date (seven months) is up around 5%. We make minor upgrades to our forecasts, and increase our fair value estimate by 4% to NZD 5.80 per share.At the current price of NZD 4.80, we believe Contact is attractive, offering a 5.4% mostly imputed dividend yield. Net debt/EBITDA should fall to comfortable levels this financial year as earnings rise and as surplus free cash flow is used to reduce debt, likely allowing dividends to increase from fiscal 2018 onwards. Further adding to the appeal for investors, imputation should steadily increase to 100% over the next few years. There is no change to our opinion that Contact is a high-quality company, warranting a narrow economic moat rating.Analyst: Adrian Atkins

Solid First Half for Contact; We Lift Our Valuation to NZD 5.80

New Zealand

Contact Energy Limited is a diversified and integrated energy company which focuses on the generation of electricity and the sale of electricity and gas in New Zealand.

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Contact Energy (CEN NZ)

Don't Be Shortsighted on New Zealand's Oversupplied Energy Market

New Zealand's vertically integrated electricity generator/retailers, or "gentailers", are high-quality businesses. The most attractive at present...

Morningstar, Inc.

Solid First Half for Contact; We Lift Our Valuation to NZD 5.80

Contact Energy's first-half fiscal 2017 result was in line with expectations, with EBITDA up 3% to NZD 261 million and net income up 12% to NZD 82...

Morningstar, Inc.

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