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>Taking a Peak at Demand — July 2022</h2>
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<p>June 2022 saw a small reversal of recent trends — hydro storage was up +22bp to 93% of average, long-dated futures fell for the first time in 2022, down -6%, and electricity demand was flat on the prior year, an improvement on recent months. June 2022 also saw two grid emergency notices garner media attention and provided further evidence peak electricity demand is growing. After a decade of new generation costs falling, the last 18 months has seen commodity prices and interest rates surge; such that we believe there has been a structural increase in new generation costs, a key driver of sector valuations. Whilst we are more positive on the sector, we are of the view the sector is fairly valued and that regulatory risks remain elevated. Our sector ratings are NEUTRAL for Contact Energy (CEN), Genesis Energy (GNE), Mercury (MCY) and Meridian Energy (MEL). We remain UNDERPERFORM on Manawa Energy (MNW).</p>
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<h3>Meeting growing peak demand to be the sector's biggest challenge</h3>
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<p>Peak demand has grown steadily (~+0.5% per&nbsp;annum) over the past decade and even faster over the last seven years (~+1.0% per&nbsp;annum) whilst annual&nbsp;electricity demand has flat-lined. The exact reasons peak electricity demand is growing faster than annual consumption is unclear, but is likely to be a combination of growth in household numbers, an increasing preference for electricity vs. gas, and increased use of heavy electricity appliances such as induction&nbsp;cooktops. We see New Zealand’s greatest electricity challenge is meeting peak demand growth and the growth in peak electricity demand indicates gas peaking generation (in particular) has a key role to play in the system for many years to come. The media coverage of&nbsp;Transpower's&nbsp;grid emergency notices during June 2022 is also a reminder of the public/political/regulatory scrutiny the electricity sector continues to face.</p>
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<h3>North Island hydro inflows early in the month have MCY in a strong position to begin FY23, helped GNE finish FY22 well</h3>
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<p>June 2022 saw the return of North Island hydro generation with daily average generation +22% above the five year average, lead by GNE schemes (up +30%). While nationwide hydro storage begins FY23 at a similar level to FY22 (93% vs 92%) the make up of this is very different. MCY's Taupo is at 152% of average vs 48% a year ago, while MEL (88% vs 96%), CEN (89% vs 131%) and GNE (69% vs 81%) begin in slightly weaker positions. Average daily electricity demand in June 2022 was flat on the prior year, a positive for the sector given industrial closures in the past 12 months and the subsequent negative electricity demand growth observed in recent months. ASX electricity price futures fell -6% during the month, though remain up +50% in 2022.</p>
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<h3>Rising cost of new generation to boost sector earnings into the back end of the decade</h3>
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<p>Surging commodity prices and interest rates has resulted in a structural increase in new generation costs, a key driver of sector valuations. We have lifted our long-term wholesale electricity prices assumption ~+9% to NZ$96/MWh. We are now more positive on the sector outlook with long-term earnings likely to be stronger than previously expected. Full details on our more positive sector view can be found in our report&nbsp;Wholesale Changes, published on July 6 2022.</p>
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Power Points Taking a Peak at Demand — July 2022


June 2022 saw a small reversal of recent trends — hydro storage was up +22bp to 93% of average, long-dated futures fell for the first time in 2022, down -6%, and electricity demand was flat on the prior year, an improvement on recent months. June 2022 also saw two grid emergency notices garner media attention and provided further evidence peak electricity demand is growing. After a decade of new generation costs falling, the last 18 months has seen commodity prices and interest rates surge; such that we believe there has been a structural increase in new generation costs, a key driver of sector valuations. Whilst we are more positive on the sector, we are of the view the sector is fairly valued and that regulatory risks remain elevated. Our sector ratings are NEUTRAL for Contact Energy (CEN), Genesis Energy (GNE), Mercury (MCY) and Meridian Energy (MEL). We remain UNDERPERFORM on Manawa Energy (MNW).



Meeting growing peak demand to be the sector's biggest challenge


Peak demand has grown steadily (~+0.5% per&nbsp;annum) over the past decade and even faster over the last seven years (~+1.0% per&nbsp;annum) whilst annual&nbsp;electricity demand has flat-lined. The exact reasons peak electricity demand is growing faster than annual consumption is unclear, but is likely to be a combination of growth in household numbers, an increasing preference for electricity vs. gas, and increased use of heavy electricity appliances such as induction&nbsp;cooktops. We see New Zealand’s greatest electricity challenge is meeting peak demand growth and the growth in peak electricity demand indicates gas peaking generation (in particular) has a key role to play in the system for many years to come. The media coverage of&nbsp;Transpower's&nbsp;grid emergency notices during June 2022 is also a reminder of the public/political/regulatory scrutiny the electricity sector continues to face.


North Island hydro inflows early in the month have MCY in a strong position to begin FY23, helped GNE finish FY22 well


June 2022 saw the return of North Island hydro generation with daily average generation +22% above the five year average, lead by GNE schemes (up +30%). While nationwide hydro storage begins FY23 at a similar level to FY22 (93% vs 92%) the make up of this is very different. MCY's Taupo is at 152% of average vs 48% a year ago, while MEL (88% vs 96%), CEN (89% vs 131%) and GNE (69% vs 81%) begin in slightly weaker positions. Average daily electricity demand in June 2022 was flat on the prior year, a positive for the sector given industrial closures in the past 12 months and the subsequent negative electricity demand growth observed in recent months. ASX electricity price futures fell -6% during the month, though remain up +50% in 2022.


Rising cost of new generation to boost sector earnings into the back end of the decade


Surging commodity prices and interest rates has resulted in a structural increase in new generation costs, a key driver of sector valuations. We have lifted our long-term wholesale electricity prices assumption ~+9% to NZ$96/MWh. We are now more positive on the sector outlook with long-term earnings likely to be stronger than previously expected. Full details on our more positive sector view can be found in our report&nbsp;Wholesale Changes, published on July 6 2022.


Power Points: Taking a Peak at Demand — July 2022