National Party Election Win a Plus for Trustpower; Outlook Remains Subdued

The recent decisive election victory for John Key's National Party government is a major positive for the New Zealand electricity companies, including Trustpower, as it removes the short-term risk of regulation. Despite the positive implications of the National Party's win, the medium-term outlook for the electricity sector is weak. We expect retail margins to remain under pressure due to Trustpower's entry into the metropolitan markets. Oversupply is also causing pricing pressure in both residential and commercial markets. We expect industry sales volumes to remain flat, as demand is stifled by ongoing energy efficiency initiatives. Our fair value estimate for Trustpower is unchanged at NZD 8.00 per share. We view the shares as slightly undervalued trading at around 10% discount to our fair value estimate. At current prices Trustpower is the cheapest of the New Zealand electricity companies under our coverage. It offers an attractive yield and is likely to exhibit stronger growth in the next five years compared to the other electricity companies as a result of its entry into Australia. However, Trustpower does not have an economic moat given its relatively small share for both generation and retail in New Zealand.