Contact Energy Fair Value Raised to Reflect a Stable Regulatory Environment

We increase our fair value estimate for Contact Energy to NZD 6.50 per share from NZD 5.50 to reflect a significant reduction in regulatory risk following the National party's election victory in September 2014. As such, we expect a stable regulatory environment going forward and have modestly revised upwards our electricity pricing assumption across our five-year explicit forecast period. Our new fair value implies enterprise value/EBITDA of 10 times, within the 9 to 11 times valuation multiple that listed integrated power companies enjoyed before the Labour party's pre-election regulatory comments. The risk of an adverse regulatory outcome caused significant compression in the valuation multiples of electricity stocks, by about 25% to 30%. Contact Energy generates nearly 70% of its electricity from low-cost hydro and geothermal plants which would have suffered immensely had Labour won the election. We reaffirm our narrow moat rating based on efficient scale.