Meridian Energy Limited

Company Overview: Power & Renewable Energy company, Meridian Energy Limited (NZX: MEL) is New Zealand’s largest electricity company where the government holds 51% stake. It is engaged  in the business of 100% electricity generation from renewal sources, trading and retailing of the same along with the  sale of complementary products and services. The Company operates through three segments: Wholesale, Retail and International.

MEL Details

Meridian Energy Limited is New Zealand's largest electricity generating company. Notably, the Government retains 51% ownership of Meridian. MEL is the only New Zealand electricity company with a customer and asset base diversified throughout different countries. The company generates 100% electricity through renewable sources. The market capitalisation of the company stood at ~$13.11 billion on September 6, 2021.

Looking at the  historical performance over FY17 to FY21, the topline and bottom line of the company grew with a compounded annual growth rate (CAGR) of 16.65% and 20.95%, respectively. Total revenue of the company improved from $2,320.0 million in FY17 to $4,296.0 million in FY21. Net Income of the company improved from $200.0 million in FY17 to $428.0 million in FY21.

Exhibit 1: Operating Performance

Source: Company Reports, Analysis by Kalkine Group

Results Performance (FY21 ended 30 June 2021)

• The company reported a 26.2% YoY growth in its revenue to $4,296 million on the back of strong retail sales growth of 14% and 15% YoY in New Zealand and Australia, respectively. However, its EBITDA decreased by 15% YoY to $729 million. Underlying net profit after tax for the full year declined by 27% YoY to $232 million. However, with the benefit of $248 million of positive non-cash movements in the value of hedge instruments, NPAT for the year increased by 145% YoY  to $428 million.
• The Board of Directors declared a final ordinary dividend of 11.20 cents per share, unchanged from the previous year. This brings the total ordinary dividends declared in FY21 to 16.90 cents per share, also unchanged from the last financial year.

Exhibit 2: Income Statement

Income Statement (Source: Company Reports)

Operational Performance for July 2021:

Total monthly inflows up 156% YoY: National hydro storage from the start of July month till the date 11 August 2021, increased from 92% to 103% of the historical average. North Island storage increased to 72% and South Island storage increased to 111% of average by 11 August 2021. Total monthly inflows were 156% of historical average.

National electricity demand up 0.7% YoY: As per the report,  national electricity demand in July 2021 was 0.7% higher than the same month last year. The month was unseasonably warm with temperatures above average for much of the country. Rainfall was mixed, including above average rainfall in the South Island.

Retail sales volume in NZ up by 13.6%: The July operating report demonstrates 13.6% YoY growth in NZ retail sales volume.

SME Reported Highest Growth: As per July operating report,  the small medium business reported growth of +31.4%, followed by corporate (+13.9%), residential (+10.3%), and agricultural (+9.4%). However, the large business volumes were -10.0% lower than July 2020.

Exhibit 3: Key Operational Data

Key Data for New Zealand Market and Australian Market (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the  pie chart, which together forms around 59.47% of the total shareholding. 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 provided in the pie chart  below:

Exhibit 4: Top 10 Shareholders

Source: Analysis by Kalkine Group

A Quick Look at Key Metrics: The company’s operating margin and net margin for FY21 stood at 14.0% and 10.0%, better than the FY20 result of 10.9% and 5.2%, respectively, implying an improvement in the operational efficiency of the company.

Exhibit 5: Key Metrics

Source: Analysis by Kalkine Group

Recent Update:

• The company stated that Electricity Authority gave an exemption under the Electricity Industry Act 2010 with regards to the appointment of Tania Simpson as the non-executive director to MEL’s Board.

On 17 August 2021, the company acknowledged  the decision of the Electricity Authority (EA)  on actions to correct the December 2019 Undesirable Trading Situation (UTS). This decision relates to the floods of December 2019 when hydro generators were managing record breaking inflows and spill past hydro power stations was inevitable.

Outlook:

The company’s balance sheet is resilient, which can be understood from the fact that S&P Global Ratings reaffirmed Meridian’s corporate credit rating as BBB+/Stable/A-2. As per the statement from Barclay, MEL’s commitment towards customer service is great. In New Zealand, Powershop won the Canstar and Consumer New Zealand awards for customer satisfaction and trust. Powershop Australia was recognised once again by Canstar Blue, Finder and Roy Morgan for customer satisfaction as well as market-leading products and service.

Besides, MEL has the scale and resources to deliver on its customer and renewable generation growth strategies and continue to generate value for its stakeholders.

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

Key Risks:

• Electricity Price Risk: The wholesale market price of electricity is affected by the dynamics of supply and demand. MEL 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.

Technical Overview:

Chart:

Source: REFINITIV

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

Stock Recommendation:

The stock has been valued using EV/EBITDA multiple based illustrative relative valuation method and the target price reflects that there might be a rise of low double-digit (in percentage terms). A discount has been applied to EV/EBITDA Multiple (NTM) (Peer Average) considering rise in the operating expenses in FY 2021 on the YoY basis. However, the company is possessing decent outlook as well as it has been striving for the clean energy future.

The stock of the company declined by 3.47% in 3 months. It has made a 52-week low and high of $4.6050 and $9.9400, respectively.

Hence, we give a “Buy” recommendation on the stock at the current market price of $5.120 per share, down by 1.82% on September 6, 2021.

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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