Meridian Energy Earnings: Good Momentum Likely To Continue in Fiscal 2024

Narrow-moat Meridian Energy MEZ performed well in fiscal 2023 despite missing most of the rain that benefited North Island hydroelectric competitors. EBITDA increased 10% to NZD 783 million, in line with expectations, and underlying net profit after tax rose 35% to NZD 315 million, beating our forecast by 9% because of lower-than-expected interest expense. Strength was broad-based, with positives including higher customer sales volumes, higher generation volumes, and higher retail prices. Dividends increased 3% to NZD 17.90 cents per share, 80% imputed for New Zealand residents. We upgrade our medium-term EBITDA forecasts by 3% after increasing expectations for retail prices and increase our fair value estimate by 4% to NZD 4.80 per share. At current prices, Meridian is slightly overvalued, offering a forecast fiscal 2024 dividend yield of 3.8%.

Wholesale division EBITDA, which includes hydroelectric generation, increased 13% to NZD 760 million in fiscal 2023. Rainfall was slightly above average, leading to a 3% increase in generation volumes and high lake storage levels. On July 31, the Waitaki catchment was at 126% of the average at that time of year, boding well for near-term generation volumes. South Island electricity futures prices average NZD 125 per megawatt hour for the next three years. These levels are conducive to strong generation profits given Meridian’s cheap hydroelectric power.

Retail EBITDA increased 18% to NZD 103 million in fiscal 2023. Mass market sales volumes increased by 5% on stronger business and agricultural demand, while mass market prices increased by 7% to pass-through high wholesale prices. Corporate sales volumes were flat, but prices increased an impressive 18%. While spot wholesale prices fell sharply in fiscal 2023 because of heavy North Island rainfall, retail prices are more closely linked to futures prices, which remain high because of elevated gas and coal prices.