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>Back to the Futures — March 2022</h2>
<p>February 2022 was a strong month in the market for electricity stocks, with all of the big four generator/retailers up at least +3%, led by Meridian Energy (MEL), up +15%. With interest rates continuing to rise, the average spread to the 10-year swap rate fell -65bp to 2.7%, just 5bp above the record low. Whilst sector earnings were solid during the 1H22 result season, we trimmed our near-term dividend outlook for the sector as a whole and the sector is looking more expensive again, particularly against other bond proxy stocks in the market. We see valuations as stretched, with our preferred names, Contact Energy (CEN) and Genesis Energy (GNE) rated NEUTRAL. Our rating on Mercury (MCY), MEL and Trustpower (TPW) is UNDERPERFORM.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/261/149/original/image_10563100121646356053972.png?1646356055" class="editor-image img-responsive" data-smartkarma-image-id="261149"></figure>
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<h3>Wholesale prices remain firm as HVDC outage causes big price split</h3>
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<p>February 2022 wholesale electricity prices dipped slightly at&nbsp;Otahuhu&nbsp;vs. January (down -2% to NZ$159/MWh) but were down sharply in the South Island (down -25% to NZ$110/MWh) due to an extended HVDC outage. The NZ$49/MWh&nbsp;spread is one of the largest on record. MEL is the most impacted from inter-island price splits, although hedging minimises the effects. Lake levels remain above average following heavy rain at the beginning of the month&nbsp;but not significantly so. Electricity demand fell -2.7%&nbsp;but was a story of two islands. North Island demand increased +2% due to increased air conditioning load, whereas South Island demand fell -10% due to lower irrigation load (-14% excl NZAS). This demand dynamic will have exacerbated the inter-island price split.</p>
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<h3>Long-dated ASX futures contract surge upwards</h3>
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<p>The key feature of the wholesale electricity markets in February 2022 was the remarkable surge in ASX futures contracts (which&nbsp;has continued into March). 2024 and 2025 contracts have increased +20% and +30% respectively to NZ$152/MWh&nbsp;and NZ$136/MWh. In our view the February news flow and thermal generation cost increases struggle to explain&nbsp;such an increase, and there appears to be an element of the market waking up to the movements of the past few months. Whilst such a strong increase in ASX futures is favourable for medium-term earnings, it only increases scrutiny on the sector from politicians and regulators alike.</p>
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<h3>Renewable development pipeline strong and getting stronger</h3>
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<p>We have added a new feature into Power Points, a list of renewable development projects at various stages of preparedness. In total, there is more than 5TW of projects ready to go that if constructed would produce ~16,000GWh per&nbsp;annum, an increase of ~+40% on current generation. The message is clear, there are plenty of development options&nbsp;the challenge is funding and construction. This was also a theme of the recent earnings season&nbsp;with all of the generator/retailers outlining their pipeline and all of them running dividend reinvestment plans, sending a strong signal that capital needs to be conserved&nbsp;for future developments.</p>
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Power Points Back to the Futures — March 2022
February 2022 was a strong month in the market for electricity stocks, with all of the big four generator/retailers up at least +3%, led by Meridian Energy (MEL), up +15%. With interest rates continuing to rise, the average spread to the 10-year swap rate fell -65bp to 2.7%, just 5bp above the record low. Whilst sector earnings were solid during the 1H22 result season, we trimmed our near-term dividend outlook for the sector as a whole and the sector is looking more expensive again, particularly against other bond proxy stocks in the market. We see valuations as stretched, with our preferred names, Contact Energy (CEN) and Genesis Energy (GNE) rated NEUTRAL. Our rating on Mercury (MCY), MEL and Trustpower (TPW) is UNDERPERFORM.


Wholesale prices remain firm as HVDC outage causes big price split


February 2022 wholesale electricity prices dipped slightly at&nbsp;Otahuhu&nbsp;vs. January (down -2% to NZ$159/MWh) but were down sharply in the South Island (down -25% to NZ$110/MWh) due to an extended HVDC outage. The NZ$49/MWh&nbsp;spread is one of the largest on record. MEL is the most impacted from inter-island price splits, although hedging minimises the effects. Lake levels remain above average following heavy rain at the beginning of the month&nbsp;but not significantly so. Electricity demand fell -2.7%&nbsp;but was a story of two islands. North Island demand increased +2% due to increased air conditioning load, whereas South Island demand fell -10% due to lower irrigation load (-14% excl NZAS). This demand dynamic will have exacerbated the inter-island price split.


Long-dated ASX futures contract surge upwards


The key feature of the wholesale electricity markets in February 2022 was the remarkable surge in ASX futures contracts (which&nbsp;has continued into March). 2024 and 2025 contracts have increased +20% and +30% respectively to NZ$152/MWh&nbsp;and NZ$136/MWh. In our view the February news flow and thermal generation cost increases struggle to explain&nbsp;such an increase, and there appears to be an element of the market waking up to the movements of the past few months. Whilst such a strong increase in ASX futures is favourable for medium-term earnings, it only increases scrutiny on the sector from politicians and regulators alike.


Renewable development pipeline strong and getting stronger


We have added a new feature into Power Points, a list of renewable development projects at various stages of preparedness. In total, there is more than 5TW of projects ready to go that if constructed would produce ~16,000GWh per&nbsp;annum, an increase of ~+40% on current generation. The message is clear, there are plenty of development options&nbsp;the challenge is funding and construction. This was also a theme of the recent earnings season&nbsp;with all of the generator/retailers outlining their pipeline and all of them running dividend reinvestment plans, sending a strong signal that capital needs to be conserved&nbsp;for future developments.


Power Points: Back to the Futures — March 2022