New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

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.

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

<h2>Genesis Energy</h2>
Slightly Underwhelming — FY19 Result Review
Whilst Genesis Energy’s (GNE) FY19 result was in line with expectations, the outlook is a little softer/lower quality than previously forecast. Higher capex, short-term Kupe challenges and a slightly lower dividend than hoped all left a slightly underwhelming outlook, but not materially so. Our target price and rating are unchanged at $3.18 and NEUTRAL respectively.
What’s changed?
<ul>
<li>Earnings: FY20 EBITDAF increased +$4m to $367m</li>
<li>Target Price: Unchanged at $3.18</li>
<li>Rating:&nbsp;NEUTRAL rating retained</li>
</ul>
Retail holds up FY19 result
GNE reported FY19 EBITDAF of $363m, in line with our forecast and marginally up on the pcp. In the context of record wholesale electricity prices, the result is slightly disappointing, albeit GNE had the worst of the operating conditions with the Pohokura gas outages flowing through into the need to import high cost coal and impacting GNE the most. The Retail performance was the standout aspect of the result, with all fuels (electricity, gas and LPG) performing well and lifting netback. Kupe’s contribution was flat (after adjusting for an accounting change).
Dividend path barely above inflation
GNE declared a final dividend of 8.6cps (80% imputed), the same as the pcp and -0.15cps lower than our forecast. Whilst holding the dividend flat is understandable given the high free cash flow payout ratio (close to 100%), FY19 dividend growth is only +0.9% and is less than inflation (although since FY15 GNE’s dividend growth is just above inflation). The dividend miss is small and immaterial, but points to GNE being keen to save cash.
Ok headline outlook numbers helped by accounting adjustments, but capex growth coming of more concern
FY20 EBITDAF guidance is $360m to $380m, consistent with past indications. However, FY20 will benefit +$7m in non-cash earnings from the adoption of IFRS 16. Similarly FY21 initial guidance of $400m to $420m ($400m+ being target earnings for the past three years) is propped up by the accounting change, so the quality is slightly lower than hoped. That said, the ~-$11m impact from lower Kupe production should reverse in FY22 once Kupe’s compression project is completed in mid-2021. The most disappointing aspect of the guidance commentary was GNE increasing maintenance capex guidance ~+$10m to between $50m and $70m. That has the greatest value effects.
Overall minor changes to forecast, no change to target price
Our FY20 to FY22 EBITDAF forecasts have not changed materially (up +1%, 0%, and down -2%), although our depreciation forecast has increased following GNE revaluing its assets upwards. Our target price is unchanged, with the negative effects of the higher capex outlook offsetting the positive impact of the reduction in our risk free rate assumption from 2.75% to 2.0%.&nbsp;
<div class="content-highlight">
Investment View
Our rating is NEUTRAL. GNE offers a sector leading dividend yield and solid earnings growth as its long-term gas contracts come to an end. However, overall we view GNE as fairly valued and its long-term transition to a post-coal generation world will pose challenges.
</div>
&nbsp;Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185

Genesis Energy
Slightly Underwhelming — FY19 Result Review
Whilst Genesis Energy’s (GNE) FY19 result was in line with expectations, the outlook is a little softer/lower quality than previously forecast. Higher capex, short-term Kupe challenges and a slightly lower dividend than hoped all left a slightly underwhelming outlook, but not materially so. Our target price and rating are unchanged at $3.18 and NEUTRAL respectively.
What’s changed?

Earnings: FY20 EBITDAF increased +$4m to $367m
Target Price: Unchanged at $3.18
Rating:&nbsp;NEUTRAL rating retained

Retail holds up FY19 result
GNE reported FY19 EBITDAF of $363m, in line with our forecast and marginally up on the pcp. In the context of record wholesale electricity prices, the result is slightly disappointing, albeit GNE had the worst of the operating conditions with the Pohokura gas outages flowing through into the need to import high cost coal and impacting GNE the most. The Retail performance was the standout aspect of the result, with all fuels (electricity, gas and LPG) performing well and lifting netback. Kupe’s contribution was flat (after adjusting for an accounting change).
Dividend path barely above inflation
GNE declared a final dividend of 8.6cps (80% imputed), the same as the pcp and -0.15cps lower than our forecast. Whilst holding the dividend flat is understandable given the high free cash flow payout ratio (close to 100%), FY19 dividend growth is only +0.9% and is less than inflation (although since FY15 GNE’s dividend growth is just above inflation). The dividend miss is small and immaterial, but points to GNE being keen to save cash.
Ok headline outlook numbers helped by accounting adjustments, but capex growth coming of more concern
FY20 EBITDAF guidance is $360m to $380m, consistent with past indications. However, FY20 will benefit +$7m in non-cash earnings from the adoption of IFRS 16. Similarly FY21 initial guidance of $400m to $420m ($400m+ being target earnings for the past three years) is propped up by the accounting change, so the quality is slightly lower than hoped. That said, the ~-$11m impact from lower Kupe production should reverse in FY22 once Kupe’s compression project is completed in mid-2021. The most disappointing aspect of the guidance commentary was GNE increasing maintenance capex guidance ~+$10m to between $50m and $70m. That has the greatest value effects.
Overall minor changes to forecast, no change to target price
Our FY20 to FY22 EBITDAF forecasts have not changed materially (up +1%, 0%, and down -2%), although our depreciation forecast has increased following GNE revaluing its assets upwards. Our target price is unchanged, with the negative effects of the higher capex outlook offsetting the positive impact of the reduction in our risk free rate assumption from 2.75% to 2.0%.&nbsp;

Investment View
Our rating is NEUTRAL. GNE offers a sector leading dividend yield and solid earnings growth as its long-term gas contracts come to an end. However, overall we view GNE as fairly valued and its long-term transition to a post-coal generation world will pose challenges.

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

Genesis Energy: Slightly Underwhelming — FY19 Result Review

New Zealand

Genesis Energy Ltd. generates, transports, and retails electricity. The Company owns and operates hydroelectric generating stations to produce electricity, as well as explores natural gas and bottled liquefied petroleum gas.

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Genesis Energy (GNE NZ)

Power Points September 2019—Powering Higher

Power Points September 2019—Powering Higher Interest rates collapsing to new lows and electricity share prices surging to new highs were the main...

Forsyth Barr

Genesis Energy: Slightly Underwhelming — FY19 Result Review

Genesis Energy Slightly Underwhelming — FY19 Result Review Whilst Genesis Energy’s (GNE) FY19 result was in line with expectations, the outlook is...

Forsyth Barr

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