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.

Contact Energy is one of New Zealand's leading producers and suppliers of electricity. It operates in an environment dominated by four electricity producers, resulting in disciplined competition and historically good pricing power. We believe Contact and the other major players will continue to dominate the industry and generate favorable returns in the long run.

Narrow-moat Contact Energy reported a solid fiscal 2024 result, with underlying EBITDA increasing by 16% to NZD 663 million and underlying net profit rising by 9% to NZD 230 million. However, the result and fiscal 2025 guidance were slightly softer than expected. We downgrade medium-term EBITDA forecasts by a few percent, but the time value of money largely offsets the impact on our valuation. We maintain our NZD 8.70 per share fair value estimate and consider the stock fairly valued. Dividends totaled NZD 0.37 per share, and fiscal 2025 guidance is NZD 0.39, imputed up to 65% for New Zealand tax residents.

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.

Contact Energy is one of New Zealand's leading producers and suppliers of electricity. It operates in an environment dominated by four electricity producers, resulting in disciplined competition and historically good pricing power. We believe Contact and the other major players will continue to dominate the industry and generate favorable returns in the long run.

Contact Energy is one of New Zealand's leading producers and suppliers of electricity. It operates in an environment dominated by four electricity producers, resulting in disciplined competition and historically good pricing power. We believe Contact and the other major players will continue to dominate the industry and generate favorable returns in the long run.

Narrow-moat Contact Energy had a strong first-half fiscal 2024, with underlying EBITDA increasing 26% to NZD 325 million on the previous corresponding period, or PCP. Management upgraded normalized fiscal 2024 EBITDA guidance by 3% to NZD 620 million on the back of the strong first half. We expect it to do a little better, based on monthly operating statistics to January, and increase our forecast by 2% to NZD 630 million, implying growth of 10% on fiscal 2023. We leave longer-term forecasts largely unchanged, with solid growth in coming years on completion of geothermal power station developments and further retail price increases. Overall, we forecast a five-year EBITDA CAGR of 8.6%. We maintain our NZD 8.20 per share fair value estimate and consider the stock fairly valued.

We downgrade our fiscal 2024 EBITDA forecast for narrow-moat-rated Contact Energy by 8% to NZD 619 million because of delays to the commissioning of the Tauhara geothermal power station development, partly offset by a strong operating performance in the financial year to date. Long-term forecasts are largely unchanged, and we maintain our NZD 8.20 fair value estimate. At current prices, the stock is fairly valued.

Contact Energy is one of New Zealand's leading producers and suppliers of electricity. It operates in an environment dominated by four electricity producers, resulting in disciplined competition and historically good pricing power. We believe Contact and the other major players will continue to dominate the industry and generate favorable returns in the long run.

Narrow-moat Contact Energy is raising NZD 400 million in equity to help fund a geothermal power station at Tauhara. We forecast the geothermal development to be earnings- and value-accretive, leading us to upgrade our fair value estimate 3% to NZD 6.80 per share. The equity raising is priced at a slight premium to our new fair value estimate, so we recommend not subscribing. But we don't have a strong view as the raising price is comfortably within our 3-star range and marginally below the current share price. Depending on their personal investment goals, it might make sense for some investors to subscribe, particularly if the share price, and thus issue price, falls below our fair value estimate.

Contact Energy is one of New Zealand's leading producers and suppliers of electricity. It operates in an environment dominated by four electricity producers, resulting in disciplined competition and historically good pricing power. We believe Contact and the other major players will continue to dominate the industry and generate favourable returns in the long run.

Narrow-moat Contact Energy’s first-half fiscal 2021 result was marginally above our expectations. Strong wholesale electricity prices due to dry weather and gas supply constraints underpinned year-on-year EBITDA growth of 11%. Wholesale EBITDA increased 12% on higher volumes and wholesale pricing. Generation volumes were flat, with lower geothermal output because of scheduled plant maintenance offset by higher hydro and thermal generation. The latter saw generation costs rise, though transmission costs fell following the grid's regulatory reset. In contrast to the good wholesale performance, retail EBITDA was flat as tariff increases and lower incentives offset higher wholesale electricity and gas costs.

Contact Energy is one of New Zealand's leading producers and suppliers of electricity. It operates in an environment dominated by four electricity producers, resulting in disciplined competition and historically good pricing power. We believe Contact and the other major players will continue to dominate the industry and generate favourable returns in the long run.

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.

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.

Contact Energy is New Zealand's leading producer and supplier of electricity. It operates in a favourable environment dominated by four electricity producers, which results in disciplined competition and historically good pricing power. We do not think the industry dynamics will change for the foreseeable future. As a result, we believe that the four major players will continue to generate favourable returns in the long run.

Origin Energy has agreed to sell its entire 53% stake in Contact Energy to Australian, New Zealand and global institutional investors. It should complete by 5 August 2015. Pleasingly, Dennis Barnes, who has spent the past four years seconded from Origin to Contact as chief executive officer, will be permanently appointed. This should provide stability in the transition period. Contact will also list on the Australian Securities Exchange. The dual listing is positive for shareholders, providing additional liquidity and greater exposure to institutional shareholders.

Contact Energy is New Zealand's leading producer and supplier of electricity. It operates in a favourable environment dominated by four electricity producers, leading to disciplined competition and historically good pricing power. We do not think the industry dynamics will change for the foreseeable future and, as a result, believe that the four major players will continue to generate favourable returns in the long run.

Contact Energy recently announced the outcome of its proposed investments into geothermal investments overseas. The firm came to the conclusion that such investments were unlikely to create shareholder value. Consequently, management decided against investing in global geothermal opportunities and has instead opted to focus on distributing cash to shareholders. In light of this, the board announced a fully imputed special dividend of NZD 0.50 per share payable on 23 June 2015 and also revised its distribution policy to approximately 100% of underlying earnings after tax.

Contact Energy is New Zealand's leading producer and supplier of electricity. It operates in a favourable environment dominated by four electricity producers, leading to disciplined competition and historically good pricing power. We do not think the industry dynamics will change for the foreseeable future and, as a result, believe that the four major players will continue to generate favourable returns in the long run.