Company Reports

Mercury is one of New Zealand's leading producers of electricity, accounting for more than 15% of the country's total generation. The firm enjoys a good retail presence with Mercury Energy being the largest supplier of electricity in the key Auckland region, with an estimated market share of 40%. Mercury currently operates in a favorable environment dominated by four electricity producers. Barring regulatory change, we believe the four major players will continue to generate favorable returns on invested capital in the long run. Mercury possesses strong competitive advantages and deserves a narrow economic moat rating.

Narrow-moat-rated Mercury NZ posted modest earnings growth in fiscal 2024. EBITDA rose 4% to NZD 877 million as lower hydroelectric generation volumes and higher operating costs largely offset higher customer prices. Guidance for fiscal 2025 EBITDA of NZD 820 million disappoints, a 6% fall on 2024 with dry weather hampering hydroelectric output and high gas supply costs. We downgrade our forecast by 10% to align with guidance. However, these factors should prove temporary as weather normalizes and the importance of gas-fired power stations diminishes as new renewables come online.

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.

Mercury is one of New Zealand's leading producers of electricity, accounting for more than 15% of the country's total generation. The firm enjoys a good retail presence with Mercury Energy being the largest supplier of electricity in the key Auckland region, with an estimated market share of 40%. Mercury currently operates in a favorable environment dominated by four electricity producers. Barring regulatory change, we believe the four major players will continue to generate favorable returns on invested capital in the long run. Mercury possesses strong competitive advantages and deserves a narrow economic moat rating.

Following a bumper fiscal 2023, with wetter-than-average hydrological conditions and record high hydro generation, inflows in the Waikato catchment have normalized in fiscal 2024. In the fiscal year to date, hydro generation fell 22% to 3,077 gigawatt hours compared with the same period last year. However, relative to the long-run historical level, Waikato inflows over the March quarter were slightly above average. We forecast that the full fiscal year 2024 hydro generation will broadly align with an average year.

Narrow-moat-rated Mercury NZ lifted fiscal 2024 EBITDA guidance by 5% to NZD 880 million after a better-than-expected first half. We increase our forecast in line and marginally lift longer-term forecasts given the positive outlook for electricity prices. We forecast a five-year EBITDA CAGR of 4.5% on completion of developments and rising retail prices. Our fair value estimate increases by 4% to NZD 5.40 per share. At current prices, the stock is overvalued. Full-year dividend guidance is unchanged at NZD 0.23 per share, representing a yield of 3.4%.

Mercury is one of New Zealand's leading producers of electricity, accounting for more than 15% of the country's total generation. The firm enjoys a good retail presence with Mercury Energy being the largest supplier of electricity in the key Auckland region, with an estimated market share of 40%. Mercury currently operates in a favorable environment dominated by four electricity producers. Barring regulatory change, we believe the four major players will continue to generate favorable returns on invested capital in the long run. Mercury possesses strong competitive advantages and deserves a narrow economic moat rating.

We maintain our NZD 5.20 fair value estimate for narrow-moat-rated Mercury NZ and consider the stock marginally overvalued at current prices. The outlook remains solid. Fiscal 2024 EBITDA is likely to be flat on last year, as rising electricity prices and increased wind and geothermal output offset lower hydroelectric generation, following record rainfall in fiscal 2023. Further growth in retail prices is likely in coming years as high futures prices are passed through to customers, and generation would lift on completion of wind and geothermal developments. We forecast EBITDA growing at an average annual rate of 4% over the five years to fiscal 2028.

Mercury is one of New Zealand's leading producers of electricity, accounting for more than 15% of the country's total generation. The firm enjoys a good retail presence with Mercury Energy being the largest supplier of electricity in the key Auckland region, with an estimated market share of 40%. Mercury currently operates in a favorable environment dominated by four electricity producers. Barring regulatory change, we believe the four major players will continue to generate favorable returns on invested capital in the long run. Mercury possesses strong competitive advantages and deserves a narrow economic moat rating.

Mercury is one of New Zealand's leading producers of electricity, accounting for more than 15% of the country's total generation. The firm enjoys a good retail presence with Mercury Energy being the largest supplier of electricity in the key Auckland region, with an estimated market share of 40%. Mercury currently operates in a favourable environment dominated by four electricity producers. Barring regulatory change, we believe the four major players will continue to generate favourable returns on invested capital in the long run. Mercury possesses strong competitive advantages and deserves a narrow economic moat rating.

Narrow-moat Mercury NZ reported a good first-half fiscal 2021, broadly in line with expectations. EBITDA increased 14% to NZD 294 million from the prior corresponding period as higher wholesale and retail electricity prices offset lower generation volumes and customer numbers. Underlying NPAT increased 28% to NZD 115 million on stronger EBITDA and lower interest costs. We make only minor adjustments to our earnings forecasts and maintain our NZD 4.00 per share fair value estimate. Mercury is significantly overvalued at present, offering a paltry 2.8% yield. We forecast EBITDA grows at an average annual rate of 4.6% in the next five years, aided by the Turitea wind farm development and a recently announced efficiency drive targeting NZD 30 million in savings and revenue benefits.

Mercury is one of New Zealand's leading producers of electricity, accounting for more than 15% of the country's total generation. The firm enjoys a good retail presence with Mercury Energy being the largest supplier of electricity in the key Auckland region, with an estimated market share of 40%. Mercury currently operates in a favourable environment dominated by four electricity producers. Barring regulatory change, we believe the four major players will continue to generate favourable returns on invested capital in the long run. Mercury possesses strong competitive advantages and deserves a narrow economic moat rating.

Mighty River is one of New Zealand's leading producers of electricity, accounting for 15% of the country's total generation. The firm enjoys a good retail presence with Mercury Energy, Mighty River's retail brand, being the largest supplier of electricity in the key Auckland region, with an estimated market share of 40%. Mighty River currently operates in a favourable environment dominated by four electricity producers, leading to some pricing power. Barring regulatory change, we expect stable industry dynamics and, as a result, believe the four major players will continue to generate favourable returns on invested capital in the long run. Given this backdrop, we think Mighty River possess strong competitive advantages and deserves a narrow economic moat rating.

We upgrade Mighty River Power's dividend forecasts despite the firm reporting a soft start to the financial year as we expect strong free cash flow to be returned to shareholders in the form of special dividends. In the September quarter, total generation increased by 17% on the previous corresponding period to 2,099GWh, driven by a 41% increase in hydro volumes as a result of high inflows into the Waikato catchment. However, good hydroelectricity production from Mighty River and peers put downward pressure on average wholesale electricity prices, which were 19% below the previous corresponding period at NZD 55 per megawatt hour, or MWh, offsetting the increase in generation volume. National electricity demand increased by 2% on previous corresponding period, underpinned by higher usage in urban centres and for milk production. Nevertheless, increased competition and lower customer numbers saw Mighty River's share of retail sales decline from 17% to 15%, contributing to a 6% decline in retail sales volumes.

Mighty River is one of New Zealand's leading producers of electricity, accounting for 17% of the country's total generation. The firm enjoys a good retail presence with Mercury Energy, Mighty River's retail brand, being the largest supplier of electricity in the fastest-growing Auckland region, with an estimated market share of 48%. Mighty River currently operates in a favourable environment dominated by four electricity producers, leading to disciplined competition and reasonably good pricing power. Barring regulatory change, we expect stable industry dynamics and, as a result, believe the four major players will continue to generate favourable returns on invested capital in the long run. Given this backdrop, we think Mighty River possess strong competitive advantages and deserves a narrow economic moat rating.

Mighty River Power's fiscal 2015 underlying net profit declined 22% to NZD 145 million, slightly below our NZD 153 million estimate. The primary driver was record-low hydro generation as a result of dry weather and reduced catchment inflow. Statutory net profit fell 78% to NZD 47 million with NZD 127 million in non-cash impairments and write-downs. We view the decision to exit international geothermal and closure of the Southdown thermal plant as long-term positives, as generation shifts to 100% renewable resources, the majority of which is hydro generation. Mighty River's renewable capacity is low-cost and future maintenance capital expenditure is reduced by the exit.

Mighty River Power's fiscal 2015 underlying net profit declined 22% to NZD 145 million, slightly below our NZD 153 million estimate. The primary driver was record-low hydro generation as a result of dry weather and reduced catchment inflow. Statutory net profit fell 78% to NZD 47 million with NZD 127 million in non-cash impairments and write-downs. We view the decision to exit international geothermal and closure of the Southdown thermal plant as long-term positives, as generation shifts to 100% renewable resources, the majority of which is hydro generation. Mighty River's renewable capacity is low-cost and future maintenance capital expenditure is reduced by the exit.

We lower our fiscal 2015 estimates for Mighty River Power on the back of the latest operating statistics released by the company. Our earnings before interest tax depreciation and amortisation, or EBITDA, forecast declines to NZD 482 million from NZD 491 million. This is at the bottom end of the firm's NZD 480 to NZD 500 million guidance issued during the first half. We have also made modest adjustments to our medium-term forecasts. However, the changes to our earnings projections are not material enough to reduce our fair value estimate of NZD 2.90 per share. Mighty River shares are fairly priced at current levels with an attractive fully imputed dividend yield of 4.6%. We maintain our narrow economic moat rating on the basis of efficient scale.

Mighty River is one of New Zealand's leading producers of electricity, accounting for 17% of the country's total generation. The firm enjoys a good retail presence with Mercury Energy, Mighty River's retail brand, being the largest supplier of electricity in the fastest-growing Auckland region, with an estimated market share of 48%. Mighty River currently operates in a favourable environment dominated by four electricity producers, leading to disciplined competition and reasonably good pricing power. Barring regulatory change, we expect stable industry dynamics and, as a result, believe the four major players will continue to generate favourable returns on invested capital in the long run. Given this backdrop, we think Mighty River possess strong competitive advantages and deserves a narrow economic moat rating.

Mighty River is one of New Zealand's leading producers of electricity, accounting for 17% of the country's total generation. The firm enjoys a good retail presence with Mercury Energy, Mighty River's retail brand, being the largest supplier of electricity in the fastest-growing Auckland region, with an estimated market share of 48%. Mighty River currently operates in a favourable environment dominated by four electricity producers, leading to disciplined competition and reasonably good pricing power. Barring regulatory change, we expect stable industry dynamics and, as a result, believe the four major players will continue to generate favourable returns on invested capital in the long run. Given this backdrop, we think Mighty River possess strong competitive advantages and deserves a narrow economic moat rating.