Contact Energy Reports Weak Result but Strong Cash Flow Underpins Reasonable Yield

Contact Energy reported an NZD 161 million underlying net profit for fiscal 2015, down 43% on the previous year but in line with our estimates. Sales volumes were stable, but unfavourable energy costs, intense competition and increased price discounting caused retail electricity margins to fall relative to fiscal 2014. A 21% increase in free cash flow was a silver lining, and cash flow is expected to remain strong, as growth capital expenditure is likely to fall significantly, relative to recent years. This will underpin the 100% target dividend payout ratio, and increases the likelihood of special dividends. Our near-term earnings estimates are unchanged, and we forecast mid-single-digit operating income growth for the five years ended fiscal 2020.