Mercury NZ Limited

Company Overview: Mercury NZ Limited (NZX: MCY) is engaged in the energy retail business. The company is an electricity retailer and generator, engaged in providing energy services to homes, businesses, and industrial customers throughout New Zealand. The company’s segments include Energy Markets (production, sales and trading of energy and related services and products as well as generation development activities) and Other Segments (metering and international geothermal development and operations).

MCY Details

Mercury NZ Limited (NZX: MCY) is engaged in generating electricity from renewable sources. The company sells electricity through its retail brands – Mercury and GLOBUG. The market capitalisation of the company stood at ~$7.7 billion on 28^th February 2022.

In the year ended 30^th June 2021, MCY witnessed resilient financial performance and the company announced 2 significant acquisitions to grow its scale as well as capabilities. It posted EBITDAF of $463 Mn for the period, reflecting a fall of 6% on FY 2020 EBITDAF of $490 Mn.

Exhibit 1: Financial Statistics

Source: Analysis by Kalkine Group

Result Performance for H1FY22 (6 Months Ended 31 December 2021)

• Net profit after tax rose 228.5%: Mercury reported a 228.5% increase in net profit to $427 million, rising from $130 million in H1FY21. The increase was largely due to the $367 million net gain on sale of Mercury’s 19.9% Tilt Renewables shareholding. Underlying earnings that normalize net profit after tax fell 23% to $89 million.
• EBITDAF fell 17%: Mercury delivered an EBITDAF of $242 million, down $48 million from H1FY21, recognising the acquisition accounting for Tilt as well as the close-out of the Norske Skog legacy contract.
• Operational expenditure increased $15 million: The company’s operational expenditure was up $15 million on the prior comparable period, while total stay-in-business capital expenditure for the period was $20 million (down $3 million).
• The Board of Directors declared an interim dividend of 8.0 cents per share.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 58.18% of the total shareholding. New Zealand Treasury holds ~52.57%, and Accident Compensation Corporation holds ~1.70%, as shown in the below chart:

Exhibit 2: Top 10 Shareholders

Source: Analysis by Kalkine Group

A Quick Look at Key Metrics: 

Exhibit 3: Key Metrics

The company has posted an ROE of 9.7% in H1 FY 2022 as compared to the industry median of 3.9%. It has recorded a current ratio of 0.54x as compared to the H1 FY 2021 figure of 0.47x, reflecting a decent liquidity position, which could help the company in navigating tough operating conditions.

Source: Analysis by Kalkine Group

Outlook:

MCY’s full-year EBITDAF guidance is at $570 Mn, which reflects impacts of the Tilt Renewables as well as Trustpower retail acquisitions and excludes likely interim insurance payment arising from Kawerau station unplanned outage.

FY22 stay-in business CAPEX guidance remains at $70 million, and FY22 ordinary dividend guidance remains at 20.0cps, fully imputed, representing an 18% increase on FY21 and the 14th consecutive year of ordinary dividend increases.

In the month of August, MCY completed the acquisition of Tilt Renewables’ New Zealand wind farms and, within the remaining period, progressively brought the Turitea North wind farm on stream. Together, these developments have significantly diversified the company’s revenue streams as well as positioned MCY well for growth.

Risks:

The company is exposed to credit, market, and liquidity risk that arises in the normal course of the business. MCY operates in a highly competitive industry, and further changes in regulatory policy pose a greater concern. The company is also prone to foreign exchange risk.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

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

Stock Performance:

Despite ongoing impacts to the business, the company has a solid roadmap ahead for any further disruptions.

The acquisition of Trustpower’s retail business could prove to be another significant milestone for the company. This would be accelerating Mercury’s retail strategy, which is centred on delivering utility solutions as well as creating more value for the customers. This acquisition also increases the company’s scale, enabling it to make meaningful deployment towards underlying IT systems.

The stock has been valued using EV/Sales based relative valuation (on an illustrative basis), and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to EV/Sales Multiple (NTM) (Peer Average) considering decent outlook as well as liquidity position.

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 facts and its current trading levels, we give a “Buy” recommendation on the stock at the current market price of NZ$5.675 per share (New Zealand Time: 12:35 PM (GMT +12)) on 28^th February 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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