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>Trustpower<br>Further Downward Revisions</h2>
<div></div>
<p><strong>UNDERPERFORM</strong></p>
<p>Trustpower's&nbsp;(TPW) update ahead of its metamorphosis into&nbsp;Manawa&nbsp;Energy has resulted in further downgrades to the outlook for the new entity. First time FY23 EBITDAF guidance is NZ$140m to NZ$160m, with the midpoint -NZ$5m below our old forecast. TPW also announced the special dividend will be 35cps, down from a possible 65cps. Negative forecast earnings, dividend and cost of capital revisions has reduced our target price -55cps (-8.9%) to NZ$5.65. UNDERPERFORM.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/268/623/original/image_64202161321649896585517.png?1649896586" class="editor-image img-responsive" data-smartkarma-image-id="268623"></figure>
<div>
<h3>What's changed?&nbsp;</h3>
</div>
<div id="m_8021073421517923935iwrmo3">
<ul>
<li><strong>Earnings</strong>:&nbsp;FY22/FY23/FY24 EBITDAF cut -NZ$2m/-NZ$4m/-NZ$3m (-1.4%/-2.8%/-1.6%) to NZ$200m/NZ$151m/NZ$142m</li>
<li><strong>Dividend</strong>: FY22/FY23/FY24 dividend cut -27cps/-5cps/-5cps to 96cps/18cps/18cps. FY22 includes a 35cps special dividend</li>
<li><strong>Target price</strong>:&nbsp;Lowered -NZ$0.55&nbsp;(-8.9%) to NZ$5.65. The lower target price is a function of the modest earnings downgrade, dividend reduction and increase in cost of capital assumption (to 5.9% from 5.5%)</li>
</ul>
</div>
<div>
<h3>Further outlook reset - we downgrade modestly</h3>
</div>
<div id="m_8021073421517923935ik4gl">
<p>TPW's&nbsp;FY23 EBITDAF guidance was modestly lower than our forecast, mainly due to lower expected avoided cost of transmission (ACOT) revenue. This has flowed through to the FY24 outlook, which we expect will be trough earnings.&nbsp;</p>
</div>
<div>
<h3>Special dividend smaller than initially indicated, cutting long-term dividend</h3>
</div>
<div id="m_8021073421517923935izcfv">
<p>TPW has announced a 35cps&nbsp;special dividend following the settlement of the retail business sale, -30cps below the 65cps initially suggested. Our revised&nbsp;long-term dividend forecast (from FY23) is 18cps, a drop of -5cps, which targets a free cash flow payout ratio of 78%,&nbsp;towards the middle of the dividend policy free cash flow payout ratio range. We expect TPW will err on the side of caution given its objectives to develop new generation assets.</p>
</div>
<div>
<h3>Longer-term outlook dependent on successful development</h3>
</div>
<div id="m_8021073421517923935it93e">
<p>TPW is gearing up to develop new&nbsp;generation, indicating it has 30 projects under review. It recently announced plans to develop a 24MW solar farm in conjunction with&nbsp;Hawkes&nbsp;Bay airport. The long-term success of TPW will depend on its ability to identify and execute on projects, most likely on a small&nbsp;to medium scale. We estimate TPW has spare balance sheet capacity of between NZ$100m to NZ$150m, a strong indicator the scale of new developments is likely to be at the smaller end relative to its larger peers.</p>
</div>

Trustpower Further Downward Revisions

UNDERPERFORM
Trustpower's&nbsp;(TPW) update ahead of its metamorphosis into&nbsp;Manawa&nbsp;Energy has resulted in further downgrades to the outlook for the new entity. First time FY23 EBITDAF guidance is NZ$140m to NZ$160m, with the midpoint -NZ$5m below our old forecast. TPW also announced the special dividend will be 35cps, down from a possible 65cps. Negative forecast earnings, dividend and cost of capital revisions has reduced our target price -55cps (-8.9%) to NZ$5.65. UNDERPERFORM.


What's changed?&nbsp;



Earnings:&nbsp;FY22/FY23/FY24 EBITDAF cut -NZ$2m/-NZ$4m/-NZ$3m (-1.4%/-2.8%/-1.6%) to NZ$200m/NZ$151m/NZ$142m
Dividend: FY22/FY23/FY24 dividend cut -27cps/-5cps/-5cps to 96cps/18cps/18cps. FY22 includes a 35cps special dividend
Target price:&nbsp;Lowered -NZ$0.55&nbsp;(-8.9%) to NZ$5.65. The lower target price is a function of the modest earnings downgrade, dividend reduction and increase in cost of capital assumption (to 5.9% from 5.5%)



Further outlook reset - we downgrade modestly


TPW's&nbsp;FY23 EBITDAF guidance was modestly lower than our forecast, mainly due to lower expected avoided cost of transmission (ACOT) revenue. This has flowed through to the FY24 outlook, which we expect will be trough earnings.&nbsp;


Special dividend smaller than initially indicated, cutting long-term dividend


TPW has announced a 35cps&nbsp;special dividend following the settlement of the retail business sale, -30cps below the 65cps initially suggested. Our revised&nbsp;long-term dividend forecast (from FY23) is 18cps, a drop of -5cps, which targets a free cash flow payout ratio of 78%,&nbsp;towards the middle of the dividend policy free cash flow payout ratio range. We expect TPW will err on the side of caution given its objectives to develop new generation assets.


Longer-term outlook dependent on successful development


TPW is gearing up to develop new&nbsp;generation, indicating it has 30 projects under review. It recently announced plans to develop a 24MW solar farm in conjunction with&nbsp;Hawkes&nbsp;Bay airport. The long-term success of TPW will depend on its ability to identify and execute on projects, most likely on a small&nbsp;to medium scale. We estimate TPW has spare balance sheet capacity of between NZ$100m to NZ$150m, a strong indicator the scale of new developments is likely to be at the smaller end relative to its larger peers.


Trustpower Ltd

Trustpower: Further Downward Revisions