Investors weighing up the Mighty River Power share offer would do well take a peek at rival company Contact Energy.
The two companies are quite similar in terms of size and what they do, but it is the return on shares invested that is of most interest, now that the government has released financial forecasts and key investment metrics in offer documents for the Mighty River partial float.
The government expects to raise up to $1.9 billion from the sale of 49% of Mighty River with the 686 million shares expected to be priced somewhere between $2.35 and $2.80 each.
The final price to be set following an institutional bookbuild could be higher or lower than that range, and Finance Minister Bill English did acknowledge yesterday that uncertainty over the future of the Tiwai Point aluminium smelter, which takes 13-15% of the country’s electricity, may be a factor here.
The price range is slightly lower than the speculation in the market leading up to yesterday’s announcement, possibly as a result of the Tiwai issue, now seen as a key risk for investors to decipher given the potential downward pressure any closure is likely to have on domestic electricity prices.
Mighty River is expecting a sharp rise in profits after suffering heavy writedowns on its offshore geothermal investments last financial year, but is expecting its underlying earnings to be flat this year before declining again in 2014. The company is looking forward to the full commissioning of its new 82MW Ngatamariki geothermal power station to better balance its portfolio against dry conditions such as being experienced now.
Based on the numbers, Mighty River is forecasting gross annual dividend yields of between 6% and 7.7% this year and next, and earnings per share of 6.77c in the current year.
Based on the price range, Mighty River will trade at a price earnings multiple of between 34.7 times and 41.4 times for the current year, falling to between 20.5 times and 24.4 times in 2014.
MRP v CEN
So then, lets compare these metrics with Contact Energy, which has been publicly listed since 1999 with a free float of 47.5% (Australia’s Origin Energy owns the other 52.5% of the company).
Contact produced a solid performance for the December half year, with after tax profit up 29% at $88 million. (Full year 2012 was $190.4 million and some analysts are expecting something similar this year).
The half-year result was achieved despite weakness on the wholesale electricity market and sustained competition in the retail market.
Forsyth Barr analyst Andrew Harvey Green reckons Contact’s half-year results showed the benefits of the company’s diverse asset portfolio and operational flexibility.
Contact's asset portfolio is made up of 50% thermal, 22% geothermal and 28% hydro. (Mighty River currently has 61% Hydro, 31% geothermal and 8% gas, although geothermal will rise above 40% once Ngatamariki is fully commissioned shortly).
Mr Harvey Green noted at Contact's half year announcement notes that the company has already outlined the possibility of increased capital returns following the completion of Te Mihi Power Station.
Te Mihi brings to an end a more than $2 billion investment programme adding lower cost geothermal and more flexible thermal generation capacity. (Contact has also and New Zealand’s first gas storage facility.)
By the numbers
Getting down to brass tacks, at its current share price of $5.50, Contact earns investors a gross dividend yield of 6.03%, has earnings per share of 29c and a PE ratio of 18.64 times.
However, based on Forsyth Barr’s 12-month target price of $6.10, Contact has a forecast 2014 gross yield of 8.7%, rising to 9.3% in 2015.
Over at Mighty River, at a share price of $2.35 investors can expect a gross yield of 7.1% for the current year, rising to 7.7% in 2014.
At $2.80, the yield is 6% increasing to 6.4% in 2014.
Put against Mighty River Power’s forecasts, Contact therefore looks quite attractive.
Looking at the figures, accountant Bruce Sheppard tells NBR ONLINE this: “Umm, investors can decide if the return premium justifies the risk.”
Demand v Supply
In more general terms, the electricity sector is quite uncertain.
As Forsyth Barr’s Harvey Green notes, the demand outlook remains weak, albeit with some signs of modest growth.
The threat of closure of industrial plants like Tiwai is an issue that is not going away anytime soon.
In fact it now seems likely that the government is favouring a “managed exit” of Tiwai Point and Prime Minister John Key is now unlikely to give any significant concessions to Rio Tinto, tempting as it may have been prior to setting the MRP price range.
Rio and Tiwai supplier Meridian Energy are scheduled to get together next week in what looms as a crucial meeting.
While Mighty River is forecasting an uptick in profits, its underlying earnings are stagnant through 2013 and are forecast to actually decline in 2014.
Mighty River notes that its exposure to the wholesale spot market varies “half hourly,” daily and throughout the year.
Much depends on Lake Taupo storage levels, Waikato catchment inflows, national hydrological conditions and market factors.
As such, right now Mighty River is having to rely much more on geothermal as hydro levels are seriously effected by the drought (Lake Taupo is at historic lows).
All these factors are listed in the offer document’s risk section.
Hence Mighty River is trumpeting the full commissioning of Ngatamariki, which will take the company’s geothermal contribution to above 40%.
Mighty River Chairwoman Joan Withers says the share float is exciting and heralds a new era for the company. The number of New Zealanders pre registering for the offer is very encouraging, she says.
But as Mr English says, potential investors must weigh up the risks themselves.