How Will Transition to Electric Vehicles Support Broader Utilities Sector – 2 Stocks to Consider

Company Overview:

Manawa Energy Limited (NZX: MNW) is one of Aotearoa NZ’s largest renewable electricity generators. Vital Limited (NZX: VTL) is the provider of fundamental nationwide infrastructure and communication services that are Vital to New Zealand. 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

Technological transformation, changes in the consumer preferences as well as demands, increased focus towards the critical role energy plays in the business competitiveness, volatility in the commodity prices, the requirement to transition to the lower carbon economy – all such factors are playing critical role in the dynamic domestic and international energy context.

Maximising the value which is obtained from energy use improves the business performance, reduces household costs and benefits the economy as a whole. There are several opportunities with regards to improving the energy efficiency and productivity than ever. NZ’s greatest potential to reduce carbon lies in the process heat sector for industrial as well as commercial users, and in the transport sector. Both have much significant proportion of non-renewable energy than the electricity. In the report titled “Aotearoa New Zealand’s First Emissions Reduction Plan,” it was mentioned that by reducing greenhouse gas emissions at the time of removing existing emissions from the atmosphere, NZ would achieve net-zero long-lived gases by 2050. Also, NZ would achieve the 24%-47% reduction in the biogenic methane.

The transition to the low-emissions economy happens to be a significant opportunity to improve the economic prosperity, reduce the living costs, restore nature, address inequality as well as improve the living standards for all the people of NZ. Climate action is an investment in higher paying jobs, more productive businesses and resilient supply chains.

Electricity Generation and Electricity Demand

Hydroelectric generation has been part of NZ’s energy system for more than 100 years as well as it continues to offer the majority of the electricity needs. Presently, there are more than 5,000 MW of installed hydro capacity. The majority of this is found in the South Island. Wind generation grew quickly as the source of electricity in NZ. As of now, the wind generation accounts for ~5% of NZ’s electricity generation. Most of the country’s wind farms are situated in the North Island.

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

The commercial sectors use around a quarter of NZ’s electricity demand. The remaining demand is from the transport sectors and the agriculture, forestry, and fishing sectors, that consume only the small amount. The combination of continued declines in solar and wind technology cost as well as limited supply of gas, reflect that the majority of new build generation is renewable. As the result, the share of electricity generation from renewable sources is anticipated to rise.

Exhibit 1: Trend in Renewable Share (%)-Four-Quarter Moving Average

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

Five Focus Areas To Drive Emissions Reductions

The efforts to drive emissions reductions in the energy and industry sectors focus towards 5 interdependent areas. The actions in such focus areas complement the NZ Emissions Trading Scheme (NZ ETS). They are established to address barriers in responding to the emissions price as well as minimise impacts on households, businesses, communities and Māori, while unlocking the health and other benefits.

• Focus Area 1: Utilise energy efficiently and manage demand for energy--Improving the energy efficiency – utilising less energy in order to perform the same task – could minimise emissions and costs. Optimising the energy use as well as energy productivity would be supporting economic prosperity and equitable transition as the economy decarbonise.
• Focus Area 2: Make sure that electricity system is ready to address future needs—The increased level of renewable generation means that the electricity system is well placed to help several other sectors – like transport and industry – move away from the fossil fuels and minimise emissions. Transpower New Zealand expects Aotearoa would be requiring 70% more renewable generation in order to electrify process heat and transport and decarbonise the NZ economy.
• Focus Area 3: Minimise the dependency on fossil fuels and support switch to low-emissions fuels-- Aotearoa would need to replace fossil fuels with low-emissions fuels like bioenergy and hydrogen to minimise the energy emissions in short term, while renewable electricity generation increases.
• Focus Area 4: Decrease emissions and energy use in the broader industry-- By 2050, Aotearoa industries would need to use low-emissions energy efficiently – to produce the materials and goods which are critical as well as to meet the consumer preferences.
• Focus Area 5: Strategic approaches and targets to guide to 2050—In order to guide achievement of the vision for 2050 – as well as provide clarity to the energy sector – the government would develop strategies and set targets for the broader energy system.

Exhibit 2: Trend in Major Energy Contributor to Net Generation in New Zealand Since March 2018 Quarter

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 3-month return of ~11.81% versus ~0.24% by the S&P/NZX 50 Index. Therefore, NZX All Energy Index overperformed NZX50 Index by ~11.57% in 3 months.

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

Source: REFINITIV

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. The country’s growing population and economy are resulting in the increased demands on the system. Even though vehicles would become more efficient, there is the risk that efficiency increases would not be sufficient to offset the higher emissions from transport in the future.

Exhibit 4. Key Risks in Utilities Sector:

Source:- Analysis: Kalkine Group

Outlook:

As per the report titled “New Zealand Energy Efficiency And Conservation Strategy 2017 – 2022”, transport makes up for ~36% of NZ’s energy use as well as 17% of NZ’s gross emissions. The transport system of the country depends almost entirely on the fossil fuels to power the cars, trucks, aircraft, rail networks and ships. Notably, 90% of transport energy is utilised in the road transport. The fuel economy of vehicles entering the fleet is poor as compared to other countries. Also, improvements in the performance have stalled since 2013.

The renewable share of electricity generation stood at 87.5% in the quarter ended March 2023. This was the highest share for the March quarter since 1996. Despite lower than usual inflows at several South Island hydro catchments, national hydro generation witnessed a rise of 7.4% from the previous March quarter.

New technology has been building up several opportunities for NZ to benefit from the higher level of renewable electricity. This has been impacting the design, operation as well as maintenance of transport infrastructure. It is of significant importance that the regulatory environment allows the widespread introduction of new applications. This could help in realising the benefits of innovation.

Coming to the innovative and efficient use of electricity, the target is that 90% of electricity would be generated from the renewable sources by 2025 (in an average hydrological year), providing security of supply is maintained. NZ’s high share of renewable electricity reflects that electrification provides the key opportunity to decarbonise NZ’s economy.

Electric vehicles, along with several other technologies, like solar panels and battery storage, offer fresh opportunities to make use of renewable resources. Such priority area also implies the potential to make more of the renewable electricity advantage via opportunities for greater electrification of sectors that have relied on the fossil fuels.

As a party to the historic Paris Agreement on climate change, NZ is committed towards reducing the greenhouse gas emissions. The country’s target is to reduce emissions to 30% below 2005 levels by 2030 as well as the future targets would be progressively more ambitious. Notably, businesses, individuals and the Government are required to work together to unlock the energy productivity and renewable potential to contribute to progress towards the target.

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: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD1.49 billion, Annual Dividend Yield (TTM)¹: 4.65%)

Business Description:

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

Outlook:

Looking to the future from an earnings perspective, MNW is largely insulated from the high inflationary environment as the company’s revenue streams are mostly linked to wholesale pricing or inflation-indexed contracts. Its EBITDAF in FY 2024 is expected to be between $120 Mn - $140 Mn as well as capex is expected to be between $65 Mn - $80 Mn.

Technical Overview:

Technical Commentary:

On the daily chart, MNW prices are trading above the horizontal trendline support zone and taking support from the trendline. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~44.705 level. However, the prices are trading below trend-following indicator 21-period SMA, which may act as a resistance level. An important support level for the stock is placed at NZD 4.3 while the key resistance level is placed at NZD 5.5.

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 4.780 per share, down by up by 0.63% as of 3 August 2023.

2 ) Vital Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 10.3 million)

Business Description:

Vital Limited (NZX: VTL) is the provider of fundamental nationwide infrastructure as well as communication services that are Vital to New Zealand.

Outlook:

The Board and Management of VTL mentioned that the company’s existing contract with St John Ambulance has been extended for additional 2 years. The current contract is due to expire in the month of March 2025 from which time the 2-year renewal period would be taking effect. From March 2027, St John would have an option for the further 2-year right of renewal through to March 2029. The company’s initial focus is towards debt reduction.

Technical Overview:

Technical Commentary

On the daily chart, VTL prices are trading above the falling trendline support level. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~68.312 level. Further, the prices are trading above the trend-following indicators 21-period SMA, which may act as a support zone. An important support level for the stock is placed at NZD 0.23 while the key resistance level is placed at NZD 0.28.

Stock Recommendation

Considering the aforementioned factors, a ‘Speculative Buy rating is given on the stock at the closing market price of NZD 0.250 per share as on 2 August 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 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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