Company Reports

Narrow-moat-rated Manawa Energy has received an attractive takeover offer from larger peer Contact Energy. The offer consists of 0.5719 Contact shares (worth NZD 4.82 at Contact’s current price) plus NZD 1.16 in cash per Manawa share. The total value of NZD 5.98 is close to our unchanged fair value estimate of NZD 6.10 per share and represents a generous 48% premium to yesterday’s closing price. Directors unanimously recommend the offer in the absence of a superior proposal and subject to a positive recommendation from the independent expert.

In a positive for the utilities, Rio Tinto has agreed to electricity supply contracts to operate New Zealand Aluminium Smelters until Dec. 31, 2044. The smelter, which accounts for about 13% of New Zealand’s electricity demand, threatened to close in 2020 because of weak aluminum prices, and its future remained uncertain until this announcement. Its closure would likely have caused much lower wholesale electricity prices for the medium term, hurting utility earnings.

Manawa is New Zealand's fifth-largest generator behind Contact Energy, Mercury NZ, Meridian, and Genesis. Like Meridian and Mercury, Manawa generates close to 100% of electricity from renewable resources. It owns 26 relatively small hydroelectric schemes in New Zealand, producing about 1,940 gigawatt hours of electricity in an average rainfall year. The firm's wind farms and retail business were divested.

Manawa is New Zealand's fifth-largest generator behind Contact Energy, Mercury NZ, Meridian, and Genesis. Like Meridian and Mercury, Manawa generates close to 100% of electricity from renewable resources. It owns 26 relatively small hydroelectric schemes in New Zealand, producing about 1,940 gigawatt hours of electricity in an average rainfall year. The firm's wind farms and retail business were divested.

Narrow-moat-rated Manawa Energy’s fiscal 2024 EBITDA of NZD 145 million was up 6% on last year and close to our expectations. Dividends surprised on the upside, up 19% to NZD 0.19 per share for the full year on an increased payout ratio, which we think is appropriate because of the good outlook. We continue to expect solid medium-term earnings growth as contracted sales prices and generation volumes rise. However, guidance for fiscal 2025 EBITDA of NZD 130 million-NZD 150 million missed our expectations because of planned outages at power stations for upgrades, which are also expected to hurt fiscal 2026.

We increase our fiscal 2024 EBITDA forecast for narrow-moat-rated Manawa Energy by 9% to NZD 144 million, in the middle of management’s recently upgraded guidance range of NZD 142 million-NZD 147 million. We also increase medium-term EBITDA forecasts by about 5% on average on persistently high wholesale electricity prices, while marginally reducing longer-term forecasts. We maintain our NZD 6.30 per share fair value estimate and consider the stock attractive at current prices. Investors are extrapolating current depressed earnings and risk missing the strong rebound that is likely in coming years as the firm’s average electricity sales price lifts.

Manawa is New Zealand's fifth-largest generator behind Contact Energy, Mercury NZ, Meridian, and Genesis. Like Meridian and Mercury, Manawa generates close to 100% of electricity from renewable resources. It owns 26 relatively small hydroelectric schemes in New Zealand, producing about 1,940 gigawatt hours of electricity in an average rainfall year. The firm's wind farms and retail business were divested.

Narrow-moat Manawa Energy's shares currently trade at a 32% discount to our fair value estimate of NZD 6.30 per share. We believe the market is extrapolating the recent negative earnings trend, which was caused by the sale of the retail business in 2022, rising operating costs as the firm ramps up development activity, and the loss of auxiliary revenue related to transmission line rebates. However, these headwinds have mostly passed and we remain positive on Manawa over the medium to long term as electricity sales prices rise. We forecast EBITDA growth to average 6% per year over the medium term, benefiting from consumer-price-index-linked sales prices under the Mercury NZ contract and re-contracting of volumes at likely higher prices as the Mercury contract progressively winds down. Earnings should also benefit from higher generation output as the firm upgrades its hydroelectric schemes and develops new wind and solar farms.

Manawa is New Zealand's fifth-largest generator behind Contact Energy, Mercury NZ, Meridian, and Genesis. Like Meridian and Mercury, Manawa generates close to 100% of electricity from renewable resources. It owns 26 relatively small hydroelectric schemes in New Zealand, producing about 1,920 gigawatt hours of electricity in an average rainfall year. The firm's wind farms and retail business were divested.

Narrow-moat-rated Manawa Energy's first-half fiscal 2024 EBITDA increased 11% to NZD 78 million on stronger hydroelectric generation and higher prices for sales to Mercury NZ. Underlying earnings increased 13% to NZD 39 million, or NZD 0.12 per share. Guidance for EBITDA of NZD 120 million to NZD 140 million in the full year is unchanged. We make only minor changes to our earnings forecasts and maintain our NZD 6.30 fair value estimate. We consider the stock undervalued at current prices. An NZD 0.08 per share dividend was declared, up 7% on the previous corresponding period, and fully imputed for New Zealand residents. We forecast a fiscal 2024 yield of 3.7% at current prices and expect solid distribution growth over the medium term.

Narrow-moat-rated Manawa Energy's share price is down more than 20% in the past year, a significant underperformance compared with other electricity “gentailers” in New Zealand. The shares are currently trading at a 30% discount to our NZD 6.30 fair value estimate. We believe the company continues to have a positive medium-term outlook due to rising electricity prices and generation volumes, as the firm upgrades its hydroelectric schemes. Over the longer term, Manawa has a significant wind and solar farm development pipeline to help meet the growing demand for renewable electricity, as New Zealand further decarbonizes.

Manawa is New Zealand's fifth-largest generator behind Contact Energy, Mercury NZ, Meridian, and Genesis. Like Meridian and Mercury, Manawa generates close to 100% of electricity from renewable resources. It owns 26 relatively small hydroelectric schemes in New Zealand, producing about 1,920 gigawatt hours of electricity in an average rainfall year. The firm's wind farms and retail business were divested.

Trustpower generates and supplies electricity to residential, commercial, and industrial consumers. The company is the fifth-largest generator behind Contact Energy, Mercury NZ, Meridian, and Genesis. Like Meridian and Mercury, Trustpower generates 100% of electricity from renewable resources. It owns 26 relatively small hydroelectric schemes in New Zealand, producing about 1,920 GWh, or gigawatt hours, of electricity in an average rainfall year. The firm's wind farms were spun out in a separately listed entity, known as Tilt Renewables.

We expect initiatives outside Trustpower's core New Zealand electricity generation business, namely the renewable energy market in Australia and its retail multiproduct strategy in New Zealand, to help drive revenue growth. Execution of pending Australian wind projects and greater clarity on their expected returns, plus further progress on the retail strategy are key catalysts for a re-rating. We make no changes to our fair value estimate of NZD 8.50. Currently, Trustpower shares are trading 11% below our fair value estimate.

Trustpower results were broadly in line with our expectations. Underlying earnings before interest, tax, depreciation and amortisation, or EBITDA, was NZD 331 million, an increase of 19.2% during the prior period. This reflected higher contribution from the Australian division as Snowtown 2's volumes increased significantly. This will be a continuing theme in 2016 as well given that Snowtown 2 was fully commissioned in 2015. Our near- and medium-term estimates are broadly intact and, consequently, our fair value estimate of NZD 8.50 remains unchanged. Our forecasts are based on normal hydrology and wind conditions which was not the case in 2015 given drier than usual conditions. We continue to believe that Trustpower possesses a narrow economic moat based on efficient scale.

We are upgrading Trustpower's economic moat rating to narrow from none. The new narrow economic moat designation recognises the structural competitive advantages New Zealand's major energy generators possess. We believe that, like other electricity generators, Trustpower's economic moat is based on efficient scale, reflecting New Zealand's small population base and limited growth prospects. We believe new entrants would find the New Zealand power market unappealing. In addition, the five major players have taken up the vast majority of low-cost geothermal as well as hydro assets and, as such, new entrants would have to make do with higher-cost thermal or unreliable wind generation. As we see it, this would make the returns unattractive for newcomers.

Trustpower’s first-half fiscal 2015 results did not surprise. Underlying earnings before interest tax, depreciation and amortisation, or EBITDA, of NZD 173 million was 13% higher than the previous corresponding period, reflecting the contribution from Snowtown 2 and acquisition of Green State Power assets. We modestly increase our EBITDA projections mainly reflecting a higher contribution from the New Zealand retail business over the medium term. Our forecasts don't assume any further wind or irrigation projects.

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.

We are raising our forecast for Trustpower as we incorporate the acquisition of Green Power hydro and wind assets in our model. This, as well as the additional cash generated since our last update, pushes Trustpower’s fair value estimate to NZD 8.00 per share from NZD 7.50 per share.

TrustPower's fiscal 2014 results were slightly ahead of our expectations. Underlying earnings before interest tax depreciation and amortisation, or EBITDA, of NZD 277 million beat our estimate of NZD 271 million. EBITDA was 6% below last year mainly because of lower hydro production and continued pressure on retail margins. We have reviewed our EBITDA numbers for fiscal 2015 and 2016 and have cut them by 2% to 3% each to reflect lower retail earnings in light of the competitive environment and increased marketing cost associated with the metro market strategy. Our forecasts don't assume any further wind or irrigation projects