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A Broker's PreView - Genesis Slips on Lower Oil Price

Overview: Investors who took part in the Genesis Energy Initial Public Offering (IPO) would have recently received notification of the allocation of their bonus shares. Retail, aka Mum & Dad investors were entitled to 1 bonus share for every 15 they purchased in the government sell down (to a maximum of 2000 bonus shares), as long as they held the shares for a year. Those investors who were quick off the mark were lucky to sell before the Company announced an earning downgrade on Wednesday this week, less than two weeks after the issuance of the bonus shares.

Pros: The shares dropped 7 percent to $2 in the aftermath of the earnings update. The update noted that Genesis expects to meet its original dividend forecast and pay 8 cents per share in October this year, bringing their full year dividend to 16 cents per share.

At $2, genesis boasts a very attractive gross dividend yield of 11 percent (this includes 6.2 cents in tax credits). This dividend yield is still well above most companies on the NZX and will be a drawcard for many investors.

Genesis also noted that forecast “Stay in Business Capital Expenditure” remains unchanged at $40-50 million. This is relatively low in the grand scheme of things and is a major reason why Genesis can maintain the high dividend yield in spite of the earnings downgrade.

Cons: The announcement noted that Net Profit after Tax will be in the region of $85-95million; this was below analyst consensus forecasts of $97 million. Genesis can point to the big drop in oil prices over the past 12 months as one reason for the downgrade.

Their share of profits from the Kupe Oil & Gas field will likely come in lower than previously expected. Having said that, we have seen a recovery in NZD crude oil prices of late, and further recovery will obviously boost earnings. The revenue Genesis receives from the oil field will start to taper off in time, with current reserves expected to sustain production until the late 2020s.

The other factor in the downgrade is lacklustre electricity and gas demand, something that is unlikely to change as our energy use becomes more efficient.

Price performance: The share price is up almost 30 percent from the IPO price of $1.55, trading at $2 soon after Wednesday’s announcement.

Investment outlook: Income investors can still find value at current prices.

*A Broker's View is written by Grant Davies, Authorised Financial Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

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