NZ Government Continues to Focus on Supporting Broader Utilities Sector – 2 Stocks to Consider

Company Overview:

Chatham Rock Phosphate Limited (NZX” CRP) is an exploration as well as development company which is focused towards becoming the diversified phosphate developer and trader. Meridian Energy Limited (NZX: MEL) is New Zealand's largest electricity company. It generates electricity from 100% renewable sources wind and water.

Kalkine’s Sector Report covers the Key Financial Metrics, Risks, Outlook, Technical Analysis along with the Valuation, Target Price, and Recommendation on the stock.

 1. Sector Landscape and Outlook

The transition to the low-emissions economy is significant opportunity to improve economic prosperity, lower the cost of living, restore nature, address inequality as well as improve living standards for all the people of NZ. Notably, climate action is a deployment towards higher paying jobs, more productive businesses and resilient supply chains. As per NZ government, the emissions reduction plan places Aotearoa New Zealand on the pathway to achieve long-term targets and contribute to global efforts to limit temperature rise to 1.5˚C above pre-industrial levels. The actions allow NZ to meet its first emissions budget. This will need Aotearoa to reduce emissions by extra 11.5 megatonnes of carbon dioxide equivalent (Mt CO2-e) between 2022 - 2025. This is the emissions equivalent of ~4.3 - 5.5 million petrol-based cars driving 10,000 kilometres per year.

NZ stated that adopting clean technologies as well as improving sustainability would be making supply chains and industries more productive. This includes moving to low-emissions manufacturing, freight and aviation. The Government would enable sustainable supply chains by putting a ban on new low- and medium-temperature coal boilers and phasing out existing ones by 2037, developing the gas transition plan to set out a path away from fossil gases and explore opportunities for renewable gases, etc.

Gas Transition Plan

The Government has been developing a plan for managing the gas industry’s transition to low emissions future. As mentioned in the Emissions Reduction Plan, the Government has been developing Gas Transition Plan which manages gas industry’s transition to the low emissions future.

MBIE has been working with gas industry co-regulator, the Gas Industry Company, in order to develop the Plan. The Gas Transition Plan would be outlining steps to be taken to 2035, while still providing for some fossil gas use in 2035. This would be in-line with Aotearoa NZ’s legislated targets, emissions budgets as well as Aotearoa NZ’s international commitments.

The Gas Transition Plan would be focusing towards 2 main pillars: 1) Setting out the fossil gas transition pathways throughout the first 3 emissions budgets to 2035, and 2) Developing the cohesive view on renewable gas market developments, including how Aotearoa NZ could effectively reduce emissions as well as lower transition costs for the fossil gas consumers. The gas consumption comes from the main sectors such as electricity generation, including co-generation, the industrial sector — like dairy, as a feedstock (i.e., non-energy use) in the petrochemical sector, the residential sector, etc.

Exhibit 1: Gross Production (Billion litres (GL)) – Monthly

*For October 2023- Provisional

Data Source: This work is owned by the Ministry of Business, Innovation and Employment on behalf of the Crown which are licensed for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Created by Kalkine Group

Electricity Demand

Around third of NZ’s electricity demand remains from the households as well as over a third is from industrial sectors. The majority of industrial electricity demand remained from wood, pulp, paper and printing sectors and the basic metals sectors, with the Tiwai Point aluminium smelter being the largest single user of electricity in the country. The commercial sectors utilise around a quarter of NZ’s electricity demand. The remaining demand is from the transport sectors and the agriculture, forestry, and fishing sectors, which consume only a small amount.

Exhibit 2: Trend in Quarterly Electricity Consumption (GWh)

Data Source: This work is owned by the Ministry of Business, Innovation and Employment on behalf of the Crown which are licensed for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Created by Kalkine Group

Index Performance:

The S&P/NZX All Energy (Sector) Index generated a 1-year return of ~4.65% versus ~1.54% by the S&P/NZX 50. Therefore, NZX All Energy Index overperformed S&P/NZX All Index.

Exhibit 3: S&P/NZX All Energy (Sector) vs S&P/NZX50 Index

Key Risks and Challenges:

The government as well as private players are supporting the low-carbon electricity systems. However, the key risk includes the uncertainty about availability of raw materials utilised in renewable electricity generation.

The companies operating in the utilities sector include climate-related risks, physical risks of slips and trips and confronting weather conditions, etc.

Exhibit 4. Key Risks in Utilities Sector:

Source:- Analysis: Kalkine Group

Outlook:

As per Energy Efficiency & Conservation Authority, the unique insights as well as expertise would be supporting wider cross-agency efforts on the transition to a low-carbon economy. This consists of collaborating on development of New Zealand Energy Strategy and related New Zealand Energy Efficiency and Conservation Strategy (or NZEECS), which would be helping in setting out how the energy sector would utilise energy more efficiently and decarbonise and ensure there is a coordinated approach throughout the whole energy system.

The transport sector is one of the most significant opportunities to reduce the energy-related emissions. The Low Emission Transport Fund would continue to support the sector in order to demonstrate and adopt low-emissions technologies, innovations, and infrastructure. Moving forward, the strategic focus areas revolve around productive and low-emissions business, efficient and low-emissions transport, energy efficient homes, government leadership, etc.

The activities that would be delivered in 2023/24 is expected to contribute to sustainable energy system in NZ which supports the prosperity and well-being of current and future generations.

Apart from the sector-specific factors, an analysis on two NZX-listed companies is provided. This report covers their insights, outlook, performance and potential as expected to be delivered in the near to medium term.

1) Chatham Rock Phosphate Limited (Recommendation: Speculative Buy, Potential Upside: High Single-Digit) (M-Cap: NZD 8.25 million)

Business Description:

Chatham Rock Phosphate Limited (NZX: CRP) is exploration and development company focused towards becoming the diversified phosphate developer and trader.

Outlook:

CRP has advised that selenium has been added to Australian Government’s Critical Minerals List. The Selenium Project consists 2 granted selenium-focused exploration areas, one near Hughenden and the other near Blackall-Tambo, both in Queensland. The addition of selenium to Australian Critical Minerals List gives significant further impetus to the Company’s activities.

Technical Overview:

Technical Commentary:

While experiencing a downtrend, CRP’s stock prices are trading near the lower boundary of a descending wedge pattern on the daily chart, anticipating for a potential rally heading to the upper edge of the pattern. Additionally, after forming multiple bottom divergences in relation to prices, the momentum oscillator RSI (14-period) is rebounding from its oversold region, further supporting for the mentioned recommendation. Prices are trading below both the trend-following 21-period and 50-period SMAs, which might function as dynamic resistance levels for the stock; in contrast, the pattern’s lower boundary may act as a dynamic support. A significant support level for the stock is positioned at NZD 0.080, while critical resistance level is located at NZD 0.111.

Stock Recommendation

Considering the facts above, a ‘Speculative Buy’ recommendation on the stock has been provided at the closing market price of NZD 0.091 per share as on 20^th December 2023.

2) Meridian Energy Limited (Recommendation: Hold, Potential Upside: Low Double-Digit) (M-Cap: NZD 13.9 billion, Annual Dividend Yield: 4.34%)

Business Description:

Meridian Energy Limited (NZX: MEL) is New Zealand's largest electricity company. It generates electricity from 100% renewable sources wind and water.

Outlook:

In the month to 11 December 2023, national hydro storage fell from 100% to 88% of historical average. The South Island storage declined to 82% of average and North Island storage rose to 113% of average by 11 December 2023. The company’s November 2023 monthly total inflows were 66% of historical average and its retail sales volumes in November 2023 were +3.2% higher than November 2022. The company is leading the market in being the first NZ company to progress grid-scale battery construction in NZ, which would add significantly more flexibility to the electricity system in the form of energy storage.

Technical Overview:

Technical Commentary

On the daily chart, MEL’s stock prices are forming a trading range characterized by nearly equal highs and lows, suggesting that the sideways period in the stock might continue to persist in the near future. Moreover, the momentum oscillator RSI (14-period) is fluctuating between the levels of 40 and 60, adding further evidence to the above observation. Prices are oscillating between its previous peak and trough, which might function as dynamic resistance and support levels for the stock, respectively. An important support level for the stock is situated at NZD 5.0, while significant resistance level is placed at NZD 6.00.

Fundamental Valuation

EV/Sales Based Relative Valuation

Stock Recommendation

Considering the aforementioned factors, a ‘Hold’ rating is given on the stock at the closing market price of NZD 5.410 per share, up by 0.37% as on 21st December  2023. 

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.

Note 1: Past performance is neither an indicator nor a guarantee of future performance.

Note 2: The reference data in this report has been partly sourced from REFINITIV.

Note 3: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level at which the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest. Support 1 refers to the nearby support level for the stock and if the price breaches the level, then Support 2 may act as the crucial support level for the stock.

Resistance: A level at which the stock prices tend to find resistance when they are rising, and an uptrend may take a pause due to profit booking or selling interest. Resistance 1 refers to the nearby resistance level for the stock and if the price surpasses the level, then Resistance 2 may act as the crucial resistance level for the stock.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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