Meridian Energy Limited

Company Overview: Meridian Energy Limited (ASX: MEZ) is a leading renewable energy company in New Zealand. It is mainly involved in the generation of electricity from 100% renewable sources – wind, water and sun. MEZ owns hydropower stations and wind farms that generate electricity. MEZ’s wholly-owned subsidiary, Meridian Energy Limited, is Australia’s leading 100% renewable energy generator. The company is listed on both the New Zealand Stock Exchange (NZX) and Australian Securities Exchange (ASX). 

MEZ Details

Rising Electricity Demand and Customer Connections to Drive Growth:

• Rising Electricity Demand: In the twelve months to May 2021, the demand for electricity was 0.5% higher than the preceding 12 months. In May month alone, the national electricity demand was 3.0% higher than the same month last year.
• Rising Customer Connection Numbers: From June 2020 to May 2021, the New Zealand customer connection numbers have increased by 5.8%.
• Focused on Rewarding Shareholders: In-line with its strategy of providing appropriate returns to its shareholders, MEZ paid an interim dividend of 5.70 NZ cents per share for H1FY21, unchanged from H1FY20.
• Rising Top-Line: From FY16 to FY20, the company’s revenue grew at a CAGR of 9.42%.

5-Year Summary (Source: Analysis by Kalkine Group)

Key Takeaways from H1FY21 Results:

• Rise in Customers: The company’s customer numbers across New Zealand and Australia have grown by 3% in H1FY21 as compared to H2FY20.
• Increase in Sales Volume: During H1FY21, MEZ witnessed 6% YoY sales volume growth in the residential segment and 14% in the small-medium business segment.
• Decline in EBITDAF: For H1FY21, the company reported EBITDAF of NZ$422 million, down from NZ$465 million in pcp, due to lower New Zealand hydro generation and lower market prices in Australia.
• Rise in Net Profit: Net profit grew by 19% YoY to NZ$227 million in H1FY21, driven by the positive changes in the value of hedge instruments.

Operational Highlights of May 2021:

• Rise in Sales: During the month of May, MEZ witnessed 5.7% YoY sales growth in the residential segment, 49.2% YoY growth in the small-medium business, and 33% YoY growth in the corporate segment.
• Rise in Electricity Demand: In May 2021, the national electricity demand was 3.0% higher than the demand in May 2020.
• Decline in Electricity Generation: MEZ’s New Zealand generation declined 20.8% YoY in May 2021, reflecting lower hydro and higher wind generation.
• Rise in Hydro Storage: In the month of May to 10 June 2021, national hydro storage grew from 67% to 70% of historical average.

Key Metrics:

For H1FY21, the company reported gross margin of 29.3%, down from 33.2% in H1FY20, impacted by lower New Zealand hydro generation and lower market prices of electricity. Net Margin for H1FY20 stood at 12.1%, up from 10.7% in H1FY20, driven by positive changes in the value of hedge instruments. Current ratio for H1FY21 stood at 0.89x, down from 0.92x in H1FY20. ROE for H1FY21 stood at 4.5%, up from 3.5% in H1FY20.

Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 59.22% of the total shareholding, while the top four constitutes the maximum holding. New Zealand Treasury and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 51.04% and 2.04%, respectively, as also highlighted in the chart below:  

(Source: Analysis by Kalkine Group)

Track Record of Paying Decent Dividends: In FY20, the company paid total ordinary dividend of 16.90 NZ cents per share, which is ~3% higher on last year. However, the company reduced its special dividend to 2.44 NZ cents per share, compared to 4.88 NZ cents in the previous year. This took the total FY20 dividend to 19.34 NZ cents. From FY16 to FY20, the company’s total dividend (comprising ordinary and special dividend) grew at a CAGR of 1.28%, reflecting MEZ’s focus on providing appropriate returns to shareholders. For H1FY21, the company has paid an interim dividend of 5.70 NZ cps, unchanged from H1FY20. At CMP of $4.98, the company’s annual dividend yield stood at 3.11%.

Dividend History (Source: Analysis by Kalkine Group)

Latest Developments:

• Extended the Closure Period at Tiwai: In January 2021, the company’s largest customer, Rio Tinto, a global mining giant that operates the Tiwai Point Aluminium Smelter in Southland, agreed to extend the planned closure period of smelter from August 2021 to December 2024.
• New Wind Farm in Hawke’s Bay: MEZ is building a new $395 million wind farm in Hawke’s Bay. It is expected that the construction will take around three years and is expected to create 260 new jobs.
• Completed Share Buyback: In connection with the FY21 executive long-term incentive scheme, MEX has completed an on-market share buyback in May 2021. Under the share buyback, MEZ acquired 476,174 ordinary shares on the NZX Main Board at an average price of NZ$5.490 per share.
• Corporate Credit Rating Reaffirmed: S&P Global Ratings, a leading credit agency, has affirmed MEZ’s corporate credit rating as ‘BBB+’/Stable/A-2.

Key Risks:

• Electricity Price Risk: The wholesale market price of electricity is affected by the dynamics of supply and demand. MEZ is exposed to the risks associated with fluctuations in the market prices of electricity as it could impact the company’s financial performance.
• Regulatory Risks: The prices of electricity are controlled by the electricity market, and by the Government and regulators. This exposes the company to regulatory risks.
• Foreign Currency Risk: The company is exposed to the risks associated with the fluctuations in the exchange rates of New Zealand and Australian dollars.

Outlook: Looking ahead, the company is focused on accelerating decarbonisation, and is actively developing new growth opportunities. The addition of four years of smelter operations will allow MEZ to create new business opportunities. The company is focused on working with range of parties who are progressing some exciting new opportunities in Southland, from mega scale data centres to hydrogen production at scale. For FY21, the company expects its capital expenditure to be at the higher end of the NZ$70 million to NZ$80 million range. Operating cost in FY21 is expected in the middle of the NZ$261 million to NZ$266 million range. The company plans to release its FY21 results on 25^th August 2021.

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

** 1 NZD = ~0.94 AUD

Stock Recommendation: The stock has corrected by 33.468% in the last three months and is trading lower than the average 52-week price level band of A$4.160 - A$9.330, offering a decent opportunity for accumulation. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight premium to its peers, considering the rising customers, improving electricity demand, and modest outlook. We have taken peers like Mercury NZ Ltd (ASX: MCY), Contact Energy Ltd (ASX: CEN), APA Group (ASX: APA), etc. Considering the rise in H1FY21 sales volume, increase in H1FY21 EBITDA, the company’s track record of paying decent dividends, current trading level and valuation, we give a “Buy” rating on the stock at the current market price of A$4.98 (as on July 15, 2021, 1:12 PM (GMT+10), Sydney, Eastern Australia).

MEZ Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

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.

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