National Party Election Win a Positive for Meridian Energy but Outlook Remains Subdued

The decisive election victory for John Key's National Party government is a major positive for the New Zealand electricity companies, including Meridian Energy, as it removes the short-term risk of regulation. Despite the positive implications of the National Party's win, the near-term outlook for the electricity sector is weak. We expect retail margins to remain under pressure as a result of the entry of Trustpower into the metropolitan markets and oversupply is 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 is unchanged at NZD 1.16 for Meridian's instalment receipts, corresponding to a fair value of NZD 1.75 per share. Trading well above fair value, we view the instalment receipts as overvalued with the market not fully incorporating the weak outlook. We retain our narrow economic moat rating reflecting the efficient scale attributes and we expect Meridian to achieve returns higher than its cost of capital for the foreseeable future. Despite trading above fair value, Meridian's dividend yield remains attractive.