Company Reports

Contact Energy is one of New Zealand's leading producers and suppliers of electricity. It operates in an environment dominated by four electricity producers, resulting in disciplined competition and historically good pricing power. We believe Contact and the other major players will continue to dominate the industry and generate favorable returns in the long run.

Narrow-moat Contact Energy had a strong first-half fiscal 2024, with underlying EBITDA increasing 26% to NZD 325 million on the previous corresponding period, or PCP. Management upgraded normalized fiscal 2024 EBITDA guidance by 3% to NZD 620 million on the back of the strong first half. We expect it to do a little better, based on monthly operating statistics to January, and increase our forecast by 2% to NZD 630 million, implying growth of 10% on fiscal 2023. We leave longer-term forecasts largely unchanged, with solid growth in coming years on completion of geothermal power station developments and further retail price increases. Overall, we forecast a five-year EBITDA CAGR of 8.6%. We maintain our NZD 8.20 per share fair value estimate and consider the stock fairly valued.

We downgrade our fiscal 2024 EBITDA forecast for narrow-moat-rated Contact Energy by 8% to NZD 619 million because of delays to the commissioning of the Tauhara geothermal power station development, partly offset by a strong operating performance in the financial year to date. Long-term forecasts are largely unchanged, and we maintain our NZD 8.20 fair value estimate. At current prices, the stock is fairly valued.

Contact Energy is one of New Zealand's leading producers and suppliers of electricity. It operates in an environment dominated by four electricity producers, resulting in disciplined competition and historically good pricing power. We believe Contact and the other major players will continue to dominate the industry and generate favorable returns in the long run.

Narrow-moat Contact Energy is raising NZD 400 million in equity to help fund a geothermal power station at Tauhara. We forecast the geothermal development to be earnings- and value-accretive, leading us to upgrade our fair value estimate 3% to NZD 6.80 per share. The equity raising is priced at a slight premium to our new fair value estimate, so we recommend not subscribing. But we don't have a strong view as the raising price is comfortably within our 3-star range and marginally below the current share price. Depending on their personal investment goals, it might make sense for some investors to subscribe, particularly if the share price, and thus issue price, falls below our fair value estimate.

Contact Energy is one of New Zealand's leading producers and suppliers of electricity. It operates in an environment dominated by four electricity producers, resulting in disciplined competition and historically good pricing power. We believe Contact and the other major players will continue to dominate the industry and generate favourable returns in the long run.

Narrow-moat Contact Energy’s first-half fiscal 2021 result was marginally above our expectations. Strong wholesale electricity prices due to dry weather and gas supply constraints underpinned year-on-year EBITDA growth of 11%. Wholesale EBITDA increased 12% on higher volumes and wholesale pricing. Generation volumes were flat, with lower geothermal output because of scheduled plant maintenance offset by higher hydro and thermal generation. The latter saw generation costs rise, though transmission costs fell following the grid's regulatory reset. In contrast to the good wholesale performance, retail EBITDA was flat as tariff increases and lower incentives offset higher wholesale electricity and gas costs.

Contact Energy is one of New Zealand's leading producers and suppliers of electricity. It operates in an environment dominated by four electricity producers, resulting in disciplined competition and historically good pricing power. We believe Contact and the other major players will continue to dominate the industry and generate favourable returns in the long run.

Contact Energy reported an NZD 161 million underlying net profit for fiscal 2015, down 43% on the previous year but in line with our estimates. Sales volumes were stable, but unfavourable energy costs, intense competition and increased price discounting caused retail electricity margins to fall relative to fiscal 2014. A 21% increase in free cash flow was a silver lining, and cash flow is expected to remain strong, as growth capital expenditure is likely to fall significantly, relative to recent years. This will underpin the 100% target dividend payout ratio, and increases the likelihood of special dividends. Our near-term earnings estimates are unchanged, and we forecast mid-single-digit operating income growth for the five years ended fiscal 2020.

Contact Energy reported an NZD 161 million underlying net profit for fiscal 2015, down 43% on the previous year but in line with our estimates. Sales volumes were stable, but unfavourable energy costs, intense competition and increased price discounting caused retail electricity margins to fall relative to fiscal 2014. A 21% increase in free cash flow was a silver lining, and cash flow is expected to remain strong, as growth capital expenditure is likely to fall significantly, relative to recent years. This will underpin the 100% target dividend payout ratio, and increases the likelihood of special dividends. Our near-term earnings estimates are unchanged, and we forecast mid-single-digit operating income growth for the five years ended fiscal 2020.

Contact Energy is New Zealand's leading producer and supplier of electricity. It operates in a favourable environment dominated by four electricity producers, which results in disciplined competition and historically good pricing power. We do not think the industry dynamics will change for the foreseeable future. As a result, we believe that the four major players will continue to generate favourable returns in the long run.

Origin Energy has agreed to sell its entire 53% stake in Contact Energy to Australian, New Zealand and global institutional investors. It should complete by 5 August 2015. Pleasingly, Dennis Barnes, who has spent the past four years seconded from Origin to Contact as chief executive officer, will be permanently appointed. This should provide stability in the transition period. Contact will also list on the Australian Securities Exchange. The dual listing is positive for shareholders, providing additional liquidity and greater exposure to institutional shareholders.

Contact Energy is New Zealand's leading producer and supplier of electricity. It operates in a favourable environment dominated by four electricity producers, leading to disciplined competition and historically good pricing power. We do not think the industry dynamics will change for the foreseeable future and, as a result, believe that the four major players will continue to generate favourable returns in the long run.

Contact Energy recently announced the outcome of its proposed investments into geothermal investments overseas. The firm came to the conclusion that such investments were unlikely to create shareholder value. Consequently, management decided against investing in global geothermal opportunities and has instead opted to focus on distributing cash to shareholders. In light of this, the board announced a fully imputed special dividend of NZD 0.50 per share payable on 23 June 2015 and also revised its distribution policy to approximately 100% of underlying earnings after tax.

Contact Energy is New Zealand's leading producer and supplier of electricity. It operates in a favourable environment dominated by four electricity producers, leading to disciplined competition and historically good pricing power. We do not think the industry dynamics will change for the foreseeable future and, as a result, believe that the four major players will continue to generate favourable returns in the long run.

Contact Energy reported a 2.5% fall in earnings before interest, tax, depreciation & amortisation, or EBITDA, in the first half of fiscal 2015. The performance of its core electricity business was nearly consistent with the half-year operating statics provided last month. Weakness reflects pressured retail margins and some one-off costs in the retail division. This was not enough to fully offset savings in generation costs given a higher mix of lower-cost renewable generation. Contact Energy's EBITDA would have been higher than last year but for the lower-than-normal utilisation of its geothermal fleet as a result of outages. The company expects geothermal utilisation to be at normal levels in the second half, which will assist margins going forward, as geothermal continues to replace higher-cost thermal generation.

Contact Energy is New Zealand's leading producer and supplier of electricity. It operates in a favourable environment dominated by four electricity producers, leading to disciplined competition and historically good pricing power. We do not think the industry dynamics will change for the foreseeable future and, as a result, believe that the four major players will continue to generate favourable returns in the long run.

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.

Contact Energy is New Zealand's leading producer and supplier of electricity. It operates in a favourable environment dominated by four electricity producers, leading to disciplined competition and historically good pricing power. We do not think the industry dynamics will change for the foreseeable future and, as a result, believe that the four major players will continue to generate favourable returns in the long run.

The recent decisive election victory for John Key's National Party government is a major positive for the New Zealand electricity companies, including Contact Energy, as it removes the short-term risk of regulation. Despite the positive implications of the National Party's win, the medium-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. Trustpower has already gained customers in Auckland, Hamilton and Wellington at the expense of Genesis Energy mainly and, to some extent, Contact Energy. Oversupply is also 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 for Contact Energy is unchanged at NZD 5.50 per share. We view the shares as fairly valued, trading close to our fair value estimate. We retain our narrow economic moat rating reflecting the efficient scale attributes and we expect Contact Energy to achieve returns higher than its cost of capital for the foreseeable future.