No shoot-the-lights-out share growth for Mighty River Power, but attractive dividends - broker

NBR paid subscribers overwhelmingly say they would buy shares in Mighty River Power.

The power company is first on the block under the government's partial asset sale programme under legislation passed last week.

Over the weekend, Craigs Investment Partners analyst said investors will see only "modest growth" in the power company's share price but should see "attractive dividends".

“You’re not going to get this shoot-the-lights-out” share growth," Craigs' Mark Lister said on TVNZ's Q&A yesterday.

Mr Lister is confident the IPO will be oversubscribed. “The interest is very strong,” he said.

"Mum and Dad investors" may not find it easy to get “big licks” of shares, he added. “I think it’ll be difficult for people to get big parcels of shares in the initial offering.”

He added that Mum and Dad investors (MADIs? – Editor) might be tapped for further capital.

“Investors might be asked to put more money in further down the track.”

RAW DATA

Q + A – July 1, 2012

MARK LISTER

Interviewed by CORIN DANN

CORIN                          Good morning, Mark. Why do people buy a share? Why do people buy into a company like Mighty River Power? What is the attraction?

MARK LISTER – Craigs Investment Partners

                                       Well, I think for a company like Mighty River Power, the real attraction, particularly for retail investors, will be that it’s a good-quality company, it’s in an industry that they understand, the earnings visibility is more obvious than average, it’s quite a predictable, stable, low-volatility sector – all of that takes you to a business that provides good cash flows, it’s quite sound, it’ll have an attractive dividend yield with modest growth.

CORIN                          But it’s not a company you would buy to make some quick-fire capital gain here. The way in which you gain is through the dividend, right? Can you explain that?

MR LISTER                  Yeah, well, I mean there's two ways that you’re going to make money out of owning shares, just like any sort of growth asset like rental property or whatever: you’re going to get an income stream off it, and you’re going to get the change in the value of the asset. And with a company that’s in a low-volatility, quite predictable, quite stable industry, you’re not going to get this shoot-the-lights-out valuation change. I think you’re going to get good stable, solid earnings growth over time, as the company sort of grows that earning stream and can increase its dividend little by little. And the share price will follow that up if they’re able to manage their business in the right way. So you’ll get your return from a mixture of those two factors, but I think the dividend will be quite key.

CORIN                          Let’s talk about that, because there's no guarantee—Let’s just say from the outset that there's always risk with investing, right? So there's no guarantee that this is necessarily going to happen with any particularly company, but you would hope that a dividend from something like Mighty River Power would pay you better than if you put the money in the bank?

MR LISTER                  You would think so. I think it absolutely will. You look at most of those companies that are in a similar sort of space, whether it’s a company like TrustPower, whether it’s other low-risk type of industries and assets like Auckland Airport, Port of Tauranga – all of those sorts of companies – Vector – they all pay you—

CORIN                          But is it the type of gain that would be better than, say—? Would you be better to pay the mortgage off? I mean, are we in that sort of ballpark?

MR LISTER                  It really depends, I think, on your personal circumstances. It can often be beneficial to just get rid of your debt straight away. That’s a very low-risk way to get a notional return, but I think people have to think about long-term growth assets, as well. You need that inflation protection. You need that income stream that’s actually going to grow with you over time.

CORIN                          How many shares do you think people will get their hands on? I mean, do you think—? We know it’s $1000 parcels, but do you think people can get $100,000 worth of shares, or they just won’t be able to get that access?

MR LISTER                  I think it’ll be difficult for people to get big parcels of shares in the initial offering, and that’s simply going to be a function of how many people are going to be wanting to be involved.

CORIN                          So you’ve got no doubts this will be oversubscribed? You’re going around the country and people are telling you that they’re keen?

MR LISTER                  Everyone I’m talking to is very interested and wants to talk about it. Obviously, the big caveat is seeing the detail, but the interest is very strong, and I think people that expect to get big licks of Mighty River Power could be in for a little bit of disappointment.

CORIN                          What would be more realistic? Sort of $5000 to $10,000 would be the type that might be allocated?

MR LISTER                  It’s hard to say, because that’s a process the government’s going to go through, but I don’t think people are going to put their hand up and say, “Well, I want $100,000 worth,” and get it easily. They’re going to be pared back, so people are going to have to think about a strategy of getting some via this initial process, and then maybe look to buy some on market further on.

CORIN                          Mark, just the issues of, you know, in terms of these investments – there are risks involved with the company coming back for money. Explain to shareholders that they could potentially be asked to help with financing some new project, right?

MR LISTER                  Yeah, absolutely. Now, companies are always or often looking to raise new money, and Mighty River Power might be no different. Who knows what's down the track for them? They might have a great idea for a new investment opportunity, and if they don’t have enough money on their balance sheet to fund that, they might come back to investors and say, “Hey, look, here’s a great idea. Can we raise some more capital off you?” So then potentially investors might be asked to put more money in further down the track.

CORIN                          And the risk is if they don’t, it could be diluted, but maybe that won’t happen that often. You don’t know.

MR LISTER                  Correct. I mean, that’s one of those things that we’ll all be looking for as we get more detail. We’ll be looking for them to tell us about what's the strategy on a three-year, five-year, 10-year basis? What are the growth opportunities out there? Have you got the money to fund them? If you haven’t, what are your intentions?

CORIN                          Interesting times over the next few months. Thank you very much, Mark Lister.

MR LISTER                  Thank you.