Manawa Energy: Elevated Electricity Prices Support Positive Outlook

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.