Contact Energy Limited

Company Overview: Contact Energy Limited (NZX: CEN) is involved in providing electricity, natural gas, and liquefied petroleum gas (LPG), along with broadband services. The electricity is generated through thermal, hydro, and geothermal sources.

CEN Details

Contact Energy Limited (NZX: CEN) is involved in providing electricity, natural gas, and liquefied petroleum gas (LPG), along with broadband services.

The market capitalisation of the company stood at ~$5.81 billion on 30^th May 2022.

Looking at the past performance over FY17 to FY21, CEN’s top line grew with a compounded annual growth rate (CAGR) of 7.1%. Total Revenue of the company improved from $1,959.0 million in FY17 to $2,573.0 million in FY21. Net Income improved from $151.0 million in FY17 to $187.0 million in FY21.

Exhibit 1: Financial Statistics

Source: Analysis by Kalkine Group

Result Performance for H1FY22 (For the Half Year Ended 31 December 2021)

• The company has delivered healthy financial performance driven by strong hydro generation and increased sales to fuel-constrained competitors.
• CEN reported statutory profit of $134 million, reflecting a rise of 72% on the same period last year. Operating earnings (EBITDAF) also improved $76 million to $322 million, up 31% YoY.
• CEN’s operating free cash flow fell from $157 million to $131 million during the period, reflecting a fall of 17% YoY.

Formed Partnership with Lightsource bp

CNE and Lightsource bp would be collaborating on the series of grid-scale solar generation projects to create up to 380,000 megawatt hours of clean, affordable electricity annually by 2026.

Under the new 50/50 JV, CEN and LSbp would be sourcing, developing as well as constructing multiple solar farm projects in numerous locations throughout NZ.

Operational Update for April 2022

The customer business of the company has logged mass market electricity and gas sales of 312GWh in April 2022 compared to 305GWh in April 2021. The mass market netback stood at $104.59/MWh against $106.11/MWh in April 2021. Its wholesale business has recorded contracted wholesale electricity sales (including the sales to customer business) of 622GWh in April 2022 against the sales of 655GWh in April 2021. The wholesale business has logged electricity and steam net revenue of $98.69/MWh compared to $107.96/MWh in April 2021.

Top 10 Shareholders: 

The top 10 shareholders have been highlighted in the table, which together forms ~19.94% of the total shareholding.

Exhibit 2: Top 10 Shareholders

Source: Analysis by Kalkine Group

A Quick Look at Key Metrics:

The company has posted a healthy improvement in net margin over FY17-21 to reach 7.3% in FY21, from 6.6% in FY17. The company has posted a significant uptick in ROE to 6.7% in FY21 from 4.6% in FY17.

Exhibit 3: Key Metrics

Analysis by Kalkine Group

Outlook:

The company’s robust operational performance from the quality asset base is helping its strategic growth ambitions. Further, it is committed to leading the decarbonisation of NZ. In line with CEN’s decarbonisation focus, there had been robust demand for the renewable electricity from forward-thinking customers. CEN is having market leading development pipeline in order to meet the anticipated market demand.

The company is having market leading development pipeline which is expected to meet the anticipated market demand. Also, Lightsource bp partnership has added to the solar development capability.

Risks:

The company is exposed to the risks of climate change and pricing. Changes to hydro inflows could affect its renewable generation. Further, changes in regulation may impact its costs of business as well as licence to operate, access to water, and consent conditions.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Performance:

The stock has been valued using P/E multiple-based illustrative relative valuation and the target price so arrived reflects the potential rise of low double-digit (in % terms). A slight premium has been applied to P/E Multiple (NTM) (Peer Average) considering its strong financial performance in H1FY22 and robust balance sheet and ramp up in strategic investments.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Considering the aforementioned factors, a “Buy” recommendation has been assigned on the stock at the closing market price of $7.440 per share, up by 0.95% as of 30^th May 2022.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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