Reasons to think twice on Mighty River

First, a disclosure and warning:

My personal sharemarket forays have been unsuccessful and anyone who bases investment decisions on a political column needs their chequebook confiscated.

Nevertheless, here’s why I’m personally wary about following up my pre-registration for shares in Mighty River Power (MRP).

Commercial risks
The first is boring: I really should pay down the mortgage.  That’s especially true given MRP and other electricity companies are more safe dividend stocks than growth stocks.

If I really were so bullish about the electricity industry that I thought it might deliver returns above the value of reducing debt, I could always have invested in Contact Energy, and I didn’t.  It is beyond my expertise to know why I would be more confident in MRP than Contact.  That’s what fund managers are for.

Recent comments by Transpower chief executive Patrick Strange are also interesting.  I had always believed that the Tiwai Point aluminium smelter had Meridian Energy over a barrel, with it being unable to get much Manapouri electricity to the North Island economically.

Dr Strange now says it is possible to get “anything we like out of the South Island” with the only “small constraint” being between the Waitaki Valley and the lower South Island.

That suggests that Tiwai closing would drive down prices more than I had assumed.

Furthermore, my understanding was that closure was at least some years away, with Tiwai contracted to pay for electricity even if it doesn’t use it until the end of 2016.  On reflection, though, why couldn’t it close earlier and the owner simply on-sell the electricity back through the grid?

It’s beyond my pay-grade to bet on how all these variables might affect the wholesale price.

There is also a degree of uncertainty about MRP’s future strategic direction.

By all accounts, the board and management have done a good job and MRP is said to be operationally first class, but chief executive Doug Heffernan is leaving with his replacement not known until after the float.

Energy News has suggested a number of internal candidates, including growth strategist Mark Trigg and operations boss Fraser Whineray.  Presumably, any would keep the company on a steady course, but the board is not ruling out an external candidate who might want to take the company in new, unexpected directions.

Political risks
These are all commercial matters, so see the disclosure and warning above, but the political risks, it seems to me, are being underestimated.

A Labour/Green government continues to be likely to be in power before Christmas next year.

Even the National Party’s own pollster, Curia’s David Farrar, reports current polls indicate 58 seats for the centre-right and 60 for Labour/Green/Mana.

It goes without saying that such a government would be exponentially further left than the Clark/Cullen government of the 2000s.  Further, as this week’s electricity policy launch reveals, both Labour and the Greens are politically committed to cutting electricity prices and ideologically determined to impose financial revenge on buyers of MRP shares.

Businesspeople may argue that that would drive down not just the value of “mum and dad” shareholdings in Contact, MRP, Meridian and Genesis but hit almost every KiwiSaver fund, along with the ACC and Superannuation funds.

Any rational person might then point out that any private-sector wealth destruction would be exceeded by the government itself, given its majority ownership of MRP, Meridian and Genesis and 100% ownership of Transpower.

Market analysts may therefore downplay the likelihood of such policies being implemented, but that would be to misread the nature of the Labour/Green mind.

Remember, Labour/Green is also committed to reducing the value of the family home.

With New Zealanders having around $650 billion invested in housing but net financial wealth of only around $50 billion, any significant reduction in the value of housing would put tens of thousands of families into negative equity.  Labour/Green would be imposing domestically the same economic circumstances that caused the financial crisis in the United States.

Some may see it as bizarre that the only major policy announcements by the incoming government would hurt the Crown’s balance sheet, drive down the value of at least four NZX20 companies majority owned by New Zealanders, worsen every household’s loan-to-value ratio and undermine the stability of the banking sector, but there you go.

It is true that the New Zealand economy is currently one of the fastest growing in the world, that unemployment is low and falling and that the government is likely to achieve surplus ahead of forecast.

But it is also true, with the polls the way they are, that it may not be a good time to invest in an energy company, in other NZX companies, in property or in anything else in New Zealand.

matthew.hooton@exceltium.com