How Government’s Initiatives Would Support Broader Utilities Sector in Achieving Targets – 2 Stocks to Consider

Company Overview: Manawa Energy Limited (NZX: MNW) is one of Aotearoa NZ’s largest renewable electricity generators. Chatham Rock Phosphate Limited (NZX” CRP) is an exploration as well as development company which is focused towards becoming the diversified phosphate developer and trader.

Kalkine’s Sector Report covers the Key Financial Metrics, Risks, Outlook, Technical Analysis along with the Valuation, Target Price, and Recommendation on the stock.

1. Sector Landscape and Outlook

New Zealand was one of around 200 countries which signed up to the Paris Agreement in the year 2016. Since then, the country has set legislated emissions reduction targets, which includes net zero greenhouse gas emissions (except biogenic methane) by 2050 as per the Climate Change Response Amendment Act (the Zero Carbon Act). New Zealand is one of only few countries which is having net zero emissions targets enshrined in law. In order to meet the target, NZ is using the system of ‘emissions budgets’ – or interim targets – which set the quantity of emissions allowed to be released during each emissions budget period. In the month of May 2022, the Government published first 3 emissions budgets (2022–2025, 2026–2030, and 2031–2035). Also, it published Emissions Reduction Plan (or ERP) which sets out the policies as well as strategies for meeting the emissions budgets and created the Climate Emergency Response Fund (or CERF) to finance some of them.

In the last year, the emissions budgets are set and the focus is towards implementing the work programmes which  deliver on them. EECA has a critical role to play in supporting people of NZ understand and reduce the energy-related emissions. In order to help meet the targets and achieve the sustainable energy system, it draws on the combination of 3 levers: co-funding and investment, regulation as well as motivating people.  

New Zealand Energy Strategy

MBIE would be developing the New Zealand Energy Strategy by 2024 end. The Work on the Strategy has been well underway, as it moves through the phase 1 of the work programme by exploring what is possible in the energy future. The aim of this 1^st phase is to lay the groundwork to foster the shared understanding of the energy system in Aotearoa NZ, with respect to its potential, limitations, and opportunities.

This means alliancing with industry, major consumers as well as Māori in order to explore the key areas of the Strategy – which includes ensuring energy affordability and equity; utilising energy more efficiently and managing demand; reducing emissions and energy use in industry; making sure that the electricity system is ready to meet the future needs; and reducing the reliance on fossil fuels while helping the transition to the low emissions fuels.

Exhibit 1: Quarterly Electricity Consumption

Data Source: This work is owned by the Ministry of Business, Innovation and Employment on behalf of the Crown which are licensed for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Created by Kalkine Group

Focus Towards Efficient And Low-Emissions Transport

As per the report by EECA, ~18.0% of NZ’s emissions come from energy use in the transport sector. When there is burning of fossil fuels such as petrol and diesel in order to power the cars, trucks, buses, boats, trains and planes, harmful greenhouse gas emissions are produced which contribute to the climate change. Even though minimising the transport sector’s emissions would not be the quick fix, optimising the moving of people and goods and making the most of available low-emissions technologies as well as fuels would be helping in achieving the actions specified in the Emissions Reduction Plan, which are required to meet the emission budgets adopted by government.

EECA is committed towards supporting the individuals as well as organisations in order to adopt energy efficient and low-emissions transport modes, behaviours, technologies, and fuels.

Also, the focus is towards optimising New Zealand’s use of renewable energy at home because 2.4% of NZ’s emissions come from the energy use in homes.  EECA is focused towards improving the energy efficiency of New Zealanders’ homes. This would not only decrease the emissions – also it would play the vital role in making sure whānau could enjoy warm, dry as well as healthy homes without higher energy costs.

Exhibit 2: Trend in Quarterly Electricity Consumption

Data Source: This work is owned by the Ministry of Business, Innovation and Employment on behalf of the Crown which are licensed for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Created by Kalkine Group

Index Performance:

The S&P/NZX All Energy (Sector) Index generated a 6-month return of ~1.82% versus ~-7.69% by the S&P/NZX All Index. Therefore, NZX All Energy Index overperformed S&P/NZX All Index.

Exhibit 3: S&P/NZX All Energy (Sector) vs S&P/NZX50 Index

Key Risks and Challenges:

The government as well as private players are supporting the low-carbon electricity systems. However, the key risk includes the uncertainty with regards to the availability of raw materials utilised in renewable electricity generation.

NZ’s long, skinny geography as well as geographical isolation make the road transport system more important. As a result of this, NZ’s population growth as well as economy are resulting in the higher demands on the system.

Exhibit 4. Key Risks in Utilities Sector:

Source:- Analysis: Kalkine Group

Outlook:

EECA’s unique insights as well as expertise would support the wider cross-agency efforts on the transition to the low-carbon economy. This consists of collaborating on the development of NZ Energy Strategy and related New Zealand Energy Efficiency and Conservation Strategy (or NZEECS), which would help in setting out how the energy sector would be utilising energy more efficiently as well as decarbonise and made sure there is co-ordinated approach throughout the whole energy system.

The effective and efficient delivery of programmes are the core focus areas across the work plan. Delivery of the expanded Government Investment in Decarbonising Industry (GIDI) Fund is the top-most priority, as the programme is expected to deliver significant amount of the emissions reductions needed over the first 3 Emissions Budget Periods.

Considering that the expanded programme is now largely established, the focus is towards partnering with businesses as well as industry to realise the emissions reductions.

The transport sector is one of the most significant opportunities to reduce energy-related emissions. The Low Emission Transport Fund would continue to help the sector to demonstrate as well as adopt low-emissions technologies, innovations, and infrastructure.

Apart from the sector-specific factors, an analysis on two NZX-listed companies is provided. This report covers their insights, outlook, performance and potential as expected to be delivered in the near to medium term.

1) Manawa Energy Limited (Recommendation: Hold, Potential Upside: High Single-Digit) (M-Cap: NZD 1.43 billion, Annual Dividend Yield (TTM)¹: 5.07%)

Business Description:

Manawa Energy Limited (NZX: MNW) is one of Aotearoa NZ’s largest renewable electricity generators.

Outlook:

MNW’s pipeline of new renewable development options progressed strongly, as it looked to play critical part in helping decarbonise as well as electrify New Zealand. The ongoing electrification of the economy is expected to witness demand for new renewable generation increasing significantly. Over the upcoming 25 years or so, MBIE is expecting that the volume of electricity from wind and solar would rise by over 400%.

Technical Overview:

Technical Commentary:

While experiencing a downtrend, MNW’s stock prices recently surpassed the upper boundary of a descending wedge pattern on the daily chart, signalling a positive trend. Moreover, after forming multiples bottom divergences, the momentum oscillator RSI (14-period) is heading north from the midpoint, reinforcing for the mentioned recommendation. Prices are trading above both trend-following indicators 21-period and 50-period SMAs, which might serve as dynamic supports levels for the stock; in contrast, the stock’s most recent high may act as a resistance. A significant support level for the stock is positioned at NZD 4.2, while critical resistance level is located at NZD 5.1.

Fundamental Valuation:

Price/EPS Based Relative Valuation

Stock Recommendation

Considering the facts above, a ‘Hold’ recommendation on the stock has been provided at the closing market price of NZD 4.59 per share, up by 1.55% as on November 16, 2023.

2) Chatham Rock Phosphate Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 12.06 million)

Business Description:

Chatham Rock Phosphate Limited (NZX: CRP) is an exploration as well as development company which is focused towards becoming the diversified phosphate developer and trader.

Outlook:

CRP announced that the Korella North Mine project is progressing steadily its Mining Lease Application. The latest milestone was the pre-lodgment meeting with the Department of Resources in Townsville which took place on November 1, 2023. The draft Mining Lease Application for Korella North was discussed as well as the areas of interest requiring further advice identified.

Technical Overview:

Technical Commentary

On the daily chart, CRP’s stock prices are fluctuating within a trading range characterized by higher highs and lower lows, suggesting that the sideways period on the stock might continue to persist in the near future. Additionally, the momentum oscillator RSI (14-period) is trading near the midpoint, adding more evidence to the above observation. Prices are oscillating between its previous peak and trough, which might function as resistance and support levels for the stock, respectively. An important support level for the stock is situated at NZD 0.123, while crucial resistance level is placed at NZD 0.151.

Stock Recommendation

Considering the aforementioned factors, a ‘Speculative Buy’ rating is given on the stock at the closing market price of NZD 0.133 per share, up by 0.76% as on 16^th November 2023.

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.

Note 1: Past performance is neither an indicator nor a guarantee of future performance.

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance levels is 16 November 2023. The reference data in this report has been partly sourced from REFINITIV.

Note 3: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level at which the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest. Support 1 refers to the nearby support level for the stock and if the price breaches the level, then Support 2 may act as the crucial support level for the stock.

Resistance: A level at which the stock prices tend to find resistance when they are rising, and an uptrend may take a pause due to profit booking or selling interest. Resistance 1 refers to the nearby resistance level for the stock and if the price surpasses the level, then Resistance 2 may act as the crucial resistance level for the stock.

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

Disclaimer

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