Overview: This week Contact Energy became the only energy gentailer on the NZX without a majority shareholder, when Australian company Origin Energy sold their 53 percent stake in the business. The sale price of $4.65 was organised by Macquarie Australia, with Origin Energy receiving $200m in NZD and $1.4b in AUD, indicating that much of the shares were sold to Australian institutions. The state of Origin’s balance sheet meant they had to take a big hit on the sale, taking an impairment charge of $270m.
Pros: The share price has held up well after the sell down, staying above $5 per share for the most part, a 7.5 percent premium for those lucky enough to take part in the sell down at $4.65.
Contact, along with most of the gentailers on the NZX, is all about cash flow. Headline Net Profit after Tax (NPAT) figures can often be misleading when looking at these companies from an investor’s perspective. This is because reported NPAT will include a hefty non-cash depreciation expense.
Usually a depreciation expense will be countered by corresponding capital expenditure (cap-ex) to maintain the assets in question. Currently, Contact’s maintenance cap-ex is far lower then its depreciation, meaning the cash most businesses would pay to maintain their assets can be paid out to shareholders.
In Contacts case, the benefit of low cap-ex for shareholders has been amplified by Origin Energy’s departure from the Company. With Origin as a majority shareholder Contact were paying dividends in line with underlying NPAT. There is potential this policy could change to see Contact operate more in line with the other gen-tailers, paying dividends based on cash flow.
Cons: The sale of Origin has resulted in a mass exodus of board members, with Contact now looking for replacements for 3 departing members. There is some risk associated with finding the right people, although for a stable business like Contact this is unlikely to have much of an impact.
The stable nature of the energy generation environment in New Zealand is perhaps Contact’s biggest risk. Demand is stagnant, with growth limited to the 1-2 percent range. Over time they will also face competition from the emergence of solar and improvements in battery technology. Todd Corp subsidiary Nova Energy is also looking to build a 100 MW gas turbine plant, which will add extra supply to the market.
Contact can at least be thankful that Tiwai remains open for the time being, as any drop in their demand will see more supply flooding the wholesale marketplace.
Price performance: The share price never got close to the $4.65 sell down price on market and has since recovered strongly.
Investment outlook: Turning water into wine is OK for some, though I’ll take turning water into cash myself. With Gas and Geothermal assets as well, Contact looks well placed.
*A Broker's View is written by Grant Davies, Investment 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.