Mercury NZ: Higher Sales Prices Are Offsetting Lower Hydroelectric Volumes

We maintain our NZD 5.20 fair value estimate for narrow-moat-rated Mercury NZ MCY 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’s electricity generation in the September quarter was down 8% on the prior corresponding period, or PCP, because of dry North Island conditions. The South Island was wetter, which boosted output from competitor hydroelectric schemes and depressed wholesale electricity prices during the quarter. That won’t have much impact on Mercury’s earnings though, as most sales are linked to futures prices, which remain high at an average of NZD 152 per megawatt-hour to mid-2026. Mass-market electricity prices increased a modest 1% on the PCP while commercial and industrial prices increased 16% to reflect continued high futures prices, pushing Mercury’s average electricity contract price up 6%. Gas and telecommunication sales prices are also rising, up 15% and 4% on the PCP, respectively.

Mercury recently announced a NZD 258 million expansion of the Nga Tamariki geothermal power station near Taupo in the North Island. This should increase the firm’s generation output by about 390 gigawatt-hours per year, or 4%. We estimate this investment will generate close to NZD 60 million in revenue per year, based on current futures prices—a worthwhile project. First generation is expected in late 2025.