Meridian Energy Limited

Company Overview: Power & Renewable Energy company, Meridian Energy Limited (NZX: MEL) is involved in the business of electricity generation, trading and retailing, and the sale of complementary products and services. The Company operates through three segments: Wholesale, Retail, and International. The Wholesale segment includes activity associated with its New Zealand electricity generation and its sale into the wholesale electricity market, purchase of electricity, and development of renewable electricity generation opportunities. The Retail segment includes activity associated with retailing of electricity and complementary products through its two brands: Meridian and Powershop in New Zealand. The International segment includes activity associated with its generation of electricity and sale into the wholesale electricity market, retailing of electricity through the Powershop brand in Australia, and licensing of the Powershop platform in the United Kingdom. The Company supplies electricity to power homes, businesses and farms.

MEL Details

Meridian Energy Limited is New Zealand's largest electricity company wherein the Government retains 51% ownership. The company generates 100% electricity through renewable sources. The market capitalisation of the company stood at ~$13.5 billion on March 29, 2021.

Looking at the past performance, the top-line of the company grew with a compounded annual growth rate (CAGR) of 9.42% over FY16 to FY20. The total revenue of the company improved from $2,375.0 million in FY16 to $3,405.0 million in FY20.

Results Performance (Half-Year ended 31 December 2020)

The company’s revenue from continuing operations for the first half period of FY21 stood at $1,869 million, an increase of 5% on the previous corresponding period (pcp). MEL reported a 9% decline in its EBITDAF, which can be attributed to lower New Zealand hydro generation and lower market prices in Australia which negatively impacted EBITDAF from last year’s record level, despite continued customer growth. Total net profit for the period stood at $227 million, an increase of 19% on pcp, including positive changes in the value of hedge instruments. Generation volume and price volatility are a feature of hydro-based renewable electricity system; however, the underlying performance of the business remains strong and it is pleasing to see that the strength of the Meridian and Powershop brands continued to shine through. Net tangible assets per Quoted Equity Security for the period stood at $1.87, as compared to $1.97 in the pcp.

The Board of Directors declared an interim dividend of 5.70 cps (86% imputed), with a record date and payment date on 31 March 2021 and 16 April 2021, respectively. No final decision has been arrived on the dividend reinvestment plan.

Exhibit 1: Income Statement

(Source: Company Reports)

Results Performance (Year ended 30 June 2020)

Group’s EBITDAF for the full-year period increased by 2% to $854 million, mainly due to increased retail performance in both New Zealand and Australia, and also on record electricity generation in New Zealand underpinned by improved wind farm availability and lake inflows that were 115% of average. There were an increase in electricity volume sold to customers by 18% in New Zealand and 24% in Australia. Net profit after tax for the period decreased by 48% reflecting higher depreciation on the previously revalued assets and movements in forward prices and rates. Underlying net profit after tax excluding fair value movements for the period declined by 5%.

There was an increase in ordinary dividends in FY20 by around 3%.

The period witnessed a significant development with Powershop New Zealand being named as Energy Retailer of the Year at the Deloitte Energy Excellence Awards, and MEL coming out on top of the major retailers in Consumer New Zealand’s power satisfaction survey.

There were tough decisions taken such as deferment of the construction of its Harapaki wind farm in the Hawke’s Bay, as Rio Tinto announced its exits plan from New Zealand.

Exhibit 2: Key Data

FY20 Key Metrics (Source: Company Reports)

Operational Performance for February 2021:

National hydro storage from the start of February month till the date 16 March 2021, decreased from 80% to 70% of the historical average. North Island storage decreased to 73% and South Island storage decreased to 70% of average by 16 March 2021. Total inflows were 54% of the historical average, the third driest February on record.

As per market data, national electricity demand in February 2021 was 4.6% lower than the same month last year. It was a dry month with mixed temperatures and soil moisture levels were around average across the country.

As per sales data of February 2021, large business segment and corporate reported growth of +17.8% each, followed by agricultural (+8.6%), SME (+6.9%), and residential (+1.2%) as compared to February 2020.

FY21 Capex is expected to be between $120 million-$130 million as compared to previously stated $70 million-$80 million.

Exhibit 3: Key Operational Data

Key Operating Information (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 63.07% of the total shareholding. New Zealand Treasury and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 51.03% and 3.90%, respectively, as provided in the table given below:

Exhibit 4: Top 10 Shareholders

A Quick Look at Key Metrics: The company’s net margin for H1FY21 stood at 12.1%, better than the industry median of 10.6%, implying an improvement in the operational efficiency of the company. Its EBITDA margin marginally improved from 25.8% in H1FY20 to 25.9% in H1FY21. Its ROE for H1FY21 stood at 4.5%, better than the industry median of 4.1%. Notably, current ratio for H1FY21 stood at 0.89x, better than the industry median of 0.53x, implying that the company possesses better capabilities to meet its short-term obligations than its peer group.

Exhibit 5: Key Metrics

(Source: Refinitiv (Thomson Reuters)), Analysis by Kalkine Group

Outlook:

MEL will soon begin construction of a new $395 million wind farm in Hawke’s Bay, boosting New Zealand’s ability to take action on climate change and accelerating the process of transformation of the economy to clean energy sources. The Harapaki Wind Farm will be New Zealand’s second-largest wind farm with 41 turbines generating 176 MW of renewable energy, enough to power over 70,000 average households. The construction will take around three years and is expected to create 260 new jobs.

Additionally, the company has reached an agreement with its largest customer, Rio Tinto, who would now be extending the planned closure period of the Tiwai Point Aluminium Smelter in Southland from August 2021 to December 2024. The additional four years of smelter operation will be invaluable to the Southland region as it allows time to create new business opportunities.

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

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

The stock has been experiencing sell-off from its high of $9.94, in the process, it made the low of $5.28 in the previous week. However, on the first trading session of the ongoing week, the stock has given a stronger close, forming ‘Bullish Harami’ pattern thereby suggesting near-term bullish reversal for the stock. The technical indicator RSI with a reading around 43 indicates neutral momentum for the stock.

Going forward, the stock may have resistance around a 61.8% retracement level of $6.00 whereas support could be around $5.00.

Stock Recommendation:

Standard & Poor’s Global Ratings has revised its credit rating outlook for MEL to BBB+/Stable from BBB+/Negative, reflecting their view that Rio Tinto’s decision to continue operations at its NZAS smelter until at least 31 December 2024, eases previously forecast pressure on earnings and energy margins. At the same time, Standard & Poor’s affirmed Meridian’s ‘BBB+’ long-term issuer credit rating and ‘A2’ short-term issuer credit rating.

Considering the aforesaid facts, we have valued the stock using EV/Revenue multiple based valuation (on an illustrative basis) and there are expectations that the stock price might witness an upside of low double-digit (in % terms). We have applied a slight discount to EV/Revenue multiple (NTM) (Peer Average) considering the risks as the company trades in the wholesale energy markets and is exposed to volatility in the forward energy prices. Also, it is exposed to the dynamic nature of the energy markets as well as weather patterns.

Thus, we give a “Buy” recommendation on the stock at the price of NZ$5.280 per share, up by 3.43% on March 29, 2021.

MEL Daily Technical Chart (Source: Refinitiv (Thomson Reuters))

Disclaimer

Kalkine New Zealand Limited is authorised to provide class advice only. The information on this site does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.