Mercury NZ Limited

Company Overview: Mercury NZ Limited (NZX: MCY) is engaged in generating electricity from renewable sources. The company sells electricity through its retail brands - Mercury and GLOBUG.

MCY Details

The market capitalisation of the company stood at ~$7.9 billion on 13^th May 2022.

Looking at the past performance over FY17 to FY21, MCY’s top line grew with a compounded annual growth rate (CAGR) of 6.4%. Total Revenue of the company improved from $1,597 million in FY17 to $2,045 million in FY21. Net Income, however, declined from $184 million in FY17 to $141 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 posted net profit after tax of $427 million in H1 FY 2022 as compared to $130 million in H1 FY 2021 mainly due to the $367 million net gain on sale of Mercury’s 19.9% Tilt Renewables shareholding.
• It has posted EBITDAF of $242 million, reflecting a decline of 17% on the YoY basis due to the impact of lower hydro generation, Kawerau outage and Norske Skog transaction.
• The Board declared the fully imputed interim dividend of 8.0 cps, reflecting an increase of 18% on the HY 2021 dividend.

Diversified Revenue Streams

In H1FY22, MCY has transformed from the company with no wind generation to the largest wind generator in New Zealand. Further, in the month of August, MCY wrapped up the acquisition of Tilt Renewables’ New Zealand wind farms (generating 482 GWh over the period) and within the remaining period, brought the Turitea North wind farm on stream, thereby, adding further 105 GWh over the period. These developments helped the company in diversifying its revenue streams and has placed the company well to drive growth. Moreover, the company expects to complete the Turitea South wind farm in mid-2023, which will enable Turitea in becoming the country’s largest wind farm.

Trustpower Retail Acquisition to Deliver Further Scale

The acquisition of Trustpower’s retail business will fast track the company’s retail strategy, and would considerably increase its scale. The company recently mentioned that the acquisition of Trustpower Limited’s retail business for the final acquisition price of $467 million is unconditional.

Introduced Capital Bond Offer

MCY, recently, has launched unsecured, subordinated capital bonds of up to $200 million (with ability  to accept oversubscriptions of up to an additional $50 Mn at MVY’s discretion) to institutional investors and New Zealand retail investors. The company expects to utilize the proceeds of the Capital Bonds to refinance drawn debt relating to the Trustpower Retail acquisition and for general corporate purposes.

On 5 May 2022, following a bookbuild for its offer of unsecured, subordinated capital bonds, the company has allocated $250 million of Capital Bonds to participants (or their clients).

Top 10 Shareholders: 

The top 10 shareholders have been highlighted in the table, which together forms ~57.49% of the total shareholding.

Exhibit 2: Top 10 Shareholders

Source: Analysis by Kalkine Group

A Quick Look at Key Metrics: 

The company’s EBITDA margin and ROE reduced to 22.6% and 3.6% in FY21, from 32.7% and 5.6% in FY17, respectively. However, the company has posted a significant uptick in current ratio to 0.83x in FY21 from 0.54x in FY20.

Exhibit 3: Key Metrics

Analysis by Kalkine Group

Outlook:

The company guided full year EBITDAF of $570 million for FY22, indicating impacts of the Tilt Renewables and Trustpower retail acquisitions and excludes possible interim insurance payment arising from Kawerau station unplanned outage. The capex guidance remains at $70 million for FY22, ordinary dividend guidance remains at 20.0cps, fully imputed, indicating a 18% rise on FY21.

Risks:

The company’s business is exposed to the risk of any decrease in the demand for electricity that could adversely affect its financial results. Further, adverse weather conditions and changes in regulatory policy also pose greater concern.

Valuation Methodology: EV/Sales 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 EV/Sales 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 EV/Sales Multiple (NTM) (Peer Average), considering its extensive renewable generation pipeline, and the acquisition benefits of Trustpower’s retail business that will enable in accelerating its retail strategy, delivering the right product mix and enhanced value for customers at a quick pace.

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, we give a “Buy” recommendation on the stock at the current market price of $5.600 per share (New Zealand Time: 12:46 PM (GMT +12)) as on 16^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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