Company Reports

Narrow-moat Genesis Energy had a stellar fiscal 2023 as its hydroelectric schemes benefited from heavy rainfall in the North Island. In the fiscal year to date, rainfall has been more modest, and we estimate earnings are tracking broadly in line with our prior expectations. We maintain our view that Genesis can achieve its EBITDA guidance of NZD 430 million for fiscal 2024 and NZD 500 million for 2025. We keep our NZD 2.70 per share fair value estimate and consider the stock slightly undervalued.

Narrow-moat-rated Genesis Energy had a weak first half fiscal 2024, mainly because of lower hydroelectric output and an outage at Huntly Power Station. Higher operating costs, related to more IT systems spending and general inflation, also hurt. However, the weak result was expected, and management kept EBITDA guidance of NZD 430 million for fiscal 2024 and NZD 500 million for 2025. We leave our earnings forecasts largely unchanged and maintain our NZD 2.70 per share fair value estimate. The stock is currently fairly valued.

Genesis operates a mix of thermal (coal and gas) and hydro generation, with total annual production of approximately 7,000 GWh. The company's hydro generation provides it with low-cost generation during times when there is sufficient rainfall and/or snowmelt. Conversely hydro generation can fall sharply when inflow to the firm's lakes recedes because of insufficient rainfall. During such times, production from its thermal power plants can be ramped up to make up for the shortfall in hydro generation. Spot prices can increase dramatically during periods of low rainfall, reflecting the demand-supply mismatch caused by lower nationwide energy output. Such times tend to favor Genesis as the excess generation is sold at higher prices. Consequently, Genesis' profitability and margins can increase during periods of low rainfall and high electricity prices.

Genesis operates a mix of thermal (coal and gas) and hydro generation, with total annual production of approximately 7,000 GWh. The company's hydro generation provides it with low-cost generation during times when there is sufficient rainfall and/or snowmelt. Conversely hydro generation can fall sharply when inflow to the firm's lakes recedes because of insufficient rainfall. During such times, production from its thermal power plants can be ramped up to make up for the shortfall in hydro generation. Spot prices can increase dramatically during periods of low rainfall, reflecting the demand-supply mismatch caused by lower nationwide energy output. Such times tend to favor Genesis as the excess generation is sold at higher prices. Consequently, Genesis' profitability and margins can increase during periods of low rainfall and high electricity prices.

Narrow-moat-rated Genesis Energy announced at its investor day that it will accelerate investment to transition to 95% renewable energy by 2035, with the investment partly funded by a 20% cut to dividends. We support the strategy, with greater investment better offsetting longer-term earnings headwinds from the depletion of Kupe and closure of thermal power stations. After lowering the dividend, the firm still offers a solid 5.9% yield at current prices, with management guiding to Consumer Price Index-like growth in dividends.

Genesis Energy's September-quarter update shows it is tracking broadly in line with guidance for fiscal 2024 EBITDA of NZD 430 million. We estimate that September-quarter EBITDA was about 12% below the previous corresponding period, excluding insurance proceeds relating to the Huntly power station outage. We maintain our earnings forecasts and NZD 2.60 per share fair value estimate. The narrow-moat-rated firm's share price is down nearly 40% from early 2021 highs and now trades at a small discount to our valuation. While the forecast dividend yield of 7.2% appears attractive, Genesis faces long-term earnings headwinds from the gradual depletion of the Kupe oil and gas field and the closure of coal and gas power stations. Overall, we forecast a five-year EBITDA CAGR of negative 2%.

Narrow-moat Genesis Energy reported a strong underlying result, but reported numbers were marred by unfavourable arbitration forcing Genesis to pay the carbon taxes associated with contracted gas purchases from Beach Energy, as previously flagged. One-off payments comprised NZD 27 million relating to carbon liabilities from prior years and NZD 33 million relating essentially to building up carbon credits to cover future liabilities. Excluding these items, fiscal 2021 EBITDA rose 17% to NZD 418 million on good performances in both the retail and wholesale divisions, 2% ahead of our expectations. Fiscal 2022 guidance is for EBITDA of NZD 420 million to NZD 440 million. We upgrade our 2022 forecast 1% to NZD 428 million. We lift our fair value estimate 4% to NZD 2.50 per share mainly on the time value of money. Nonetheless, the stock screens as expensive. While Genesis offers a healthy forecast dividend yield of 5.2%, it faces long-term headwinds from depletion of the Kupe oil and gas field and closure of its thermal power station fleet.

Despite a pullback from record highs, narrow-moat Genesis Energy shares remain materially overvalued relative to our unchanged fair value estimate of NZD 2.40. While overvalued, Genesis Energy shares offer investors an attractive fiscal 2021 dividend yield of 5.0%.

Narrow-moat Genesis Energy posted a strong first-half fiscal 2021 result, with EBITDA jumping 30% to NZD 217 million from the previous corresponding period, or pcp. The result was mainly driven by a good retail performance and unfavourable gas supply contracts rolling off. With a good first half in the bag and a favourable outlook, management upgraded full-year EBITDA guidance 4% to NZD 415 to 425 million. At the midpoint, this implies growth of 18% on last year, which was depressed by low rainfall and a planned shutdown of the Kupe oil and gas field. We upgrade our fiscal 2021 EBITDA forecast 4% to NZD 421 million but longer-term forecasts are intact. From fiscal 2020 to 2025, we forecast an EBITDA CAGR of 4.5%, which is largely unchanged. Further out, there are major earnings headwinds from depletion of Kupe, which currently contributes about a quarter of EBITDA. We maintain our NZD 2.40 fair value estimate and consider the stock overvalued.

Genesis operates a mix of thermal and hydro generation, with total annual production of approximately 7,000 GWh. The firm's thermal power plants use a mixture of coal and natural gas for fuel. The company's hydro generation provides it with low-cost generation during times when there is sufficient rainfall and/or snowmelt. Conversely hydro generation can fall sharply when inflow to the firm's lakes recedes because of insufficient rainfall. During such times, production from its thermal power plants can be ramped up to make up for the shortfall in hydro generation. Spot prices can increase dramatically during periods of low rainfall, reflecting the demand-supply mismatch caused because of lower nationwide energy output. Such times tend to favour Genesis as the excess generation is sold at higher prices. Consequently, Genesis's profitability and margins can increase during periods of low rainfall and high electricity prices.

In spite of notoriously volatile weather conditions and strong retail competition, Genesis Energy's fiscal 2015 net profit after tax increased 113%, to NZD 105 million. The result exceeded our NZD 77 million estimate, chiefly because of a one-off, NZD 33 million hedging windfall, with additional contributions from lower operating expenses and increased fuel efficiency. Pleasingly, free cash flow grew 22% to NZD 198 million reflecting meaningfully lower maintenance capital expenditure, consistent with the maturing industry and relatively weak growth outlook. We expect free cash flow to strengthen during the five years ending fiscal 2020, as Genesis retires the coal-fired electricity generation capacity by 2018 and shifts towards lower-cost, more efficient renewable energy.

We make slight modifications to our near- and medium-term projections following the release of the firm's third-quarter operating results and guidance. Genesis expects to miss its full-year earnings before interest tax depreciation and amortisation, or EBITDA, target of NZD 363 million reflecting softer retail sales numbers, lower hydro generation and fall in international oil prices. Consequently, we lower our 2015 EBITDA projections by 7.2% to NZD 330 million, which is at the bottom of the firm's guidance of between NZD 330 and NZD 345 million. We also make adjustments to our long-term forecasts given a competitive market for electricity and gas, especially in Auckland where Genesis has a significant presence. We lower our forecasts for retail and electricity customer numbers through our five-year explicit forecast period. This, however, has been somewhat offset by higher sales to commercial and industrial customers.

Genesis Energy is one of New Zealand's leading producers of electricity, accounting for 17% of the country's total generation. The firm enjoys a strong retail presence and, with approximately 556,591 customers, Genesis Energy has the highest retail market share at about 27%. The New Zealand electricity market is dominated by four major players that include Genesis Energy and three other vertically integrated power companies. As such, we believe Genesis Energy deserves a narrow economic moat rating on the basis of efficient scale given New Zealand's small population base and limited growth opportunities which could preclude would-be entrants from earning an adequate return on capital. Consequently, Genesis Energy, as with its peers, should continue to earn returns above its cost of capital in the long run.

Genesis Energy is one of New Zealand's leading producers of electricity, accounting for 17% of the country's total generation. The firm enjoys a strong retail presence and, with approximately 556,591 customers, Genesis Energy has the highest retail market share at about 27%. The New Zealand electricity market is dominated by four major players that include Genesis Energy and three other vertically integrated power companies. As such, we believe Genesis Energy deserves a narrow economic moat rating on the basis of efficient scale given New Zealand's small population base and limited growth opportunities which could preclude would-be entrants from earning an adequate return on capital. Consequently, Genesis Energy, as with its peers, should continue to earn returns above its cost of capital in the long run.

Genesis Energy is one of New Zealand's leading producers of electricity, accounting for 17% of the country's total generation. The firm enjoys a strong retail presence and, with approximately 556,591 customers, Genesis Energy has the highest retail market share at about 27%. The New Zealand electricity market is dominated by four major players that include Genesis Energy and three other vertically integrated power companies. As such, we believe Genesis Energy deserves a narrow economic moat rating on the basis of efficient scale given New Zealand's small population base and limited growth opportunities which could preclude would-be entrants from earning an adequate return on capital. Consequently, Genesis Energy, like its peers, should continue to earn returns above its cost of capital in the long run.

Genesis Energy's underlying earnings before interest tax depreciation and amortisation, or EBITDA, at NZD 172 million in first half fiscal 2015 was similar to the previous corresponding period. Higher earnings from the company's retail business was counterbalanced by reduced earnings from oil and gas due to lower oil production. The generation division enjoyed higher prices because of drier conditions but this was offset by lower hydro generation in the North Island.

Genesis Energy is one of New Zealand's leading producers of electricity, accounting for 17% of the country's total generation. The firm enjoys a strong retail presence and, with approximately 556,591 customers, Genesis Energy has the highest retail market share at about 27%. The New Zealand electricity market is dominated by four major players that include Genesis Energy and three other vertically integrated power companies. As such, we believe Genesis Energy deserves a narrow economic moat rating on the basis of efficient scale given New Zealand's small population base and limited growth opportunities which could preclude would-be entrants from earning an adequate return on capital. Consequently, Genesis Energy, like its peers, should continue to earn returns above its cost of capital in the long run.

We increase our fair value estimate for Genesis Energy to NZD 2.20 per share from NZD 1.85 per share to reflect a significant reduction in regulatory risk following the National party's election victory in September 2014. The risk of regulation caused a significant compression in the valuation multiples of electricity stocks, to the tune of around 25% to 30%. As such we expect a stable regulatory environment going forward. Our new fair value estimate implies an enterprise value/EBITDA of 8.5 times, below the 9 to 11 times valuation multiple of other integrated power companies given Genesis' exposure to the Kupe oil and gas field, which will see declining earnings over the next several years. We reaffirm our narrow economic moat rating based on efficient scale.

The decisive election victory for John Key's National Party government is a major positive for the New Zealand electricity companies, including Genesis 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 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 Genesis is unchanged at NZD 1.80 per share. Trading above fair value, we view the shares as slightly 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 Genesis to achieve returns higher than its cost of capital for the foreseeable future. Despite trading above fair value, Genesis's dividend yield remains attractive.

Genesis Energy is one of New Zealand's leading producers of electricity, accounting for 17% of the country's total generation. The firm enjoys a strong retail presence and, with approximately 556,591 customers, Genesis Energy has the highest retail market share at about 27%. The New Zealand electricity market is dominated by four major players that include Genesis Energy and three other vertically integrated power companies. As such, we believe Genesis Energy deserves a narrow economic moat rating on the basis of efficient scale given New Zealand's small population base and limited growth opportunities which could preclude would-be entrants from earning an adequate return on capital. Consequently, Genesis Energy, like its peers, should continue to earn returns above its cost of capital in the long run.