How Is NZ’s Utilities Sector Placed Amidst Macro Uncertainties – 2 Stocks to Consider

Company Overview:

Chatham Rock Phosphate Limited (NZX: CRP) is an exploration and development company which is focused towards becoming a diversified phosphate developer and trader. Contact Energy Limited (NZX: CEN) is a New Zealand-based energy generators and retailers. 

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

1. Sector Landscape and Outlook 

As per MBIE (or Ministry of Business, Innovation and Employment), a large amount of NZ’s total primary energy supply (TPES) comes from renewable resources. Hydro, geothermal, wind and bioenergy are utilised to produce electricity in NZ. New Zealand is a country which is rich in geothermal resources due to several volcanic areas, and faults and tectonic features. Geothermal energy is the fuel type having largest contribution to the TPES but electricity generated from geothermal energy is a much lower proportion. Since geothermal fluid is much lower in temperature as compared to steam produced by coal or a gas boiler, the transformation efficiency to electricity is much lower. The efficiency is ~15%, therefore, geothermal energy supplies less than a fifth of NZ’s electricity even though it contributes to more than half of the renewable energy supply. EECA stated that NZ’s EV drivers would have more options to recharge on the go, with 341 high-speed public DC charge points approved for Government co-funding across NZ’s urban areas.

Around a third of NZ’s electricity demand is from households and over a third is from industrial sectors. The majority of industrial electricity demand comes from the wood, pulp, paper as well as printing sectors and the basic metals sectors, with the Tiwai Point aluminium smelter being the largest single user of electricity in the country.

Exhibit 1: Net Generation and Consumption (GWh)

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

New Zealand Energy Strategy

The government’s energy strategies set the policy direction and priorities for the NZ energy sector and focus towards transitioning to a net zero carbon emissions by 2050, while developing a more productive, sustainable and inclusive economy. NZ’s energy system has served has a positive long-term energy outlook. However, new challenges have been emerging as the country’s energy system undergoes fundamental change. For example, electricity demand is expected to increase significantly by 2050 and meeting this demand would need a huge increase in investment in generation and networks, running into many tens of billions of dollars. 

Ensuring security of supply as well as affordability as the energy system decarbonises remains critical. The Government’s approach focuses on removing barriers, provides certainty and makes sure that incentives are aligned across the system. 

Exhibit 2: Energy Intensity

Note: Energy intensity is the amount of energy each sector of the NZ economy uses to produce each unit of GDP (MJ/$, GDP in real 2009/10 prices)

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

Key Risks and Challenges:

The companies operating in the utilities sector might face risks including higher generation costs, unplanned outages, etc. Notably, fluctuation in the fuel costs might also pose a challenge for the broader utilities sector.  Also, the broader energy sector is exposed to challenges such as resource scarcity, environmental challenges and energy price volatility. Moreover, uncertain macroeconomic environment and geopolitical tensions add a layer of uncertainty.

Exhibit 3. Key Risks in Utilities Sector:

Source:- Analysis: Kalkine Group

Outlook:

New Zealand’s energy production derives from renewable as well as non-renewable sources. There is import and export of fossil fuels, which generates export revenue but also results in a dependency and vulnerability to energy commodity prices. These vary as per international supply and demand factors that are outside of NZ’s control. As per New Zealand 2023 (Energy Policy Review) by International Energy Agency, NZ possesses an attractive opportunity to leverage the clean electricity sector to advance electrification as a decarbonisation strategy in other sectors. This would need significant technological investments to support electrification in transport and industry and will also necessitate a sizeable buildout of additional renewables generation capacity to cater to accelerated load growth, along with additional grid and storage investments. 

Overall, NZ has the potential to reach its emissions reduction and energy targets on the basis of natural resources and policy levers.

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) Contact Energy Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 7.56 billion, Annual Dividend Yield (TTM)¹: 5.26%)

Business Description:

Contact Energy Limited (NZX: CEN) is a New Zealand-based energy generators and retailers. 

Outlook:

Looking ahead, CEN stated that the next twelve months would see the company operating over 200MW of newly constructed geothermal power stations and building a diverse set of new renewable projects as it delivers on its Contact26 strategy to be a leader in the decarbonisation of New Zealand. Notably, emissions intensity from thermal generation was down 32% on FY 2023 driven mainly due to the closure of Te Rapa on 30 June 2023. CEN is committed to being net zero from its generation activities by 2035. Operating free cash flow of $470 Mn was up 67% on the prior year due to the improved operating result, relatively lower levels of working capital because of higher thermal generation and reflecting the continued capitalisation of interest on Tauhara borrowings.

Technical Overview:

CEN Daily Technical Chart, Data Source: REFINITIV

Technical Commentary:

On the daily chart, CEN’s stock prices are undergoing an uptrend downtrend characterized by higher highs and higher lows, suggesting a positive bias. Moreover, the momentum oscillator RSI (14-period) is trading above its midpoint, adding more evidence to the mentioned recommendation. Prices are trading between its previous peak and trough, which might serve as resistance and support levels for the stock, respectively. A significant support level for the stock is positioned at NZD 8.40, while critical resistance level is located at NZD 11.0.

Fundamental Valuation:

Price/EPS Based Relative Valuation

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 9.480 per share, up by 0.11% as on 23 January 2025.

2) Chatham Rock Phosphate Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 10.5 Mn)

Business Description:

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

Outlook:

CRP announced that the company is proceeding with a non-brokered private placement of up to 5,000,000 units at a price of CAD 0.07 per Unit (NZD 0.086 or AUD 0.078) for gross proceeds of up to CAD 350,000 (NZD 430,000 or AUD 390,000). The Private Placement funds raised would be used for the following purposes- 1) Completion of the permitting process for the Avenir Makatea onshore phosphate project in French Polynesia with anticipated operating cash flows in 2026, 2) The first steps in a Fast Track reapplication for a Marine (Environmental) Consent on the Chatham Rise, and 3) General working capital.

Technical Overview:

CRP Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

On the daily chart, CRP's stock is moving within a trading range, indicating that the sideways trend may continue in the near term. Currently, the stock is near the lower boundary of this range, where the 14-period RSI momentum oscillator is showing a bottom divergence with the price action, hinting at a potential rebound from the lower boundary. Prices are trading between its previous peak and trough, which might function as a resistance and support levels for the stock, respectively. An important support level for the stock is situated at NZD 0.085, while crucial resistance level is placed at NZD 0.11.

Stock Recommendation

Considering the aforementioned factors, a “Speculative Buy” rating is given on the stock at the closing market price of NZD 0.098 per share, down by 1.01% as on 23^rd January 2025.

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 23 January 2025. 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.

Note 4: Kalkine reports are prepared based on the stock prices captured either from REFINITIV or Trading View. Typically, REFINITIV or Trading View may reflect stock prices with a delay which could be a lag of 25-30 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

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.