Rising Electricity Prices and Capacity Addition Set to Expand NZ’s Energy and Utility Sector

I. Sector Landscape and Outlook

As per the Ministry of Business, Innovation and Employment (MBIE), the energy intensity bettered in the calendar year 2020. It fell 4.6% (A fall in the indicator is considered an improvement) in 2020. Earlier to 2020, the national average energy intensity was falling on an average of 1.4% per annum since 1990. This growth in 2020 was primarily led by continued economic growth in the commercial sector, which is comparatively less energy-intensive than other economies as it is service-based. In addition, the renewable energy share of the Total Primary Energy Supply (TPES) was ~39% in 2019, and now it is expected to increase to 46% by 2035.

Further, the government forecasts transport energy consumption to rebound by 7.8% in 2021, followed by a growth of 3.8% and 1.3% in 2022 and 2023, respectively. After that, demand for transport energy is forecasted to plateau for the next four years as the uptake of EVs (Electric Vehicles) increases.

Robust Electricity Generation in September 2021 Quarter

As per MBIE, the electricity generation increased 6.0% QoQ to 11,544GWh in September 2021 quarter, mainly driven by a rise in Hydro (up 25.5% to 6,739GWh), followed by Gas (up 1.1% to 1,380GWh) and Wind (up 10.6% to 721GWh). The renewable share stood at 83.6% in September 2021 quarter, better than 74.9% in June 2021 quarter. Hydroelectric generation has played a crucial role in energy systems for over 100 years and continues to contribute to most electricity needs. NZ has over 5,000 MW of installed hydro capacity, primarily in the South Island. Electricity generation from coal, oil, and gas combustion is approximately a quarter of NZ’s electricity generation.

Exhibit 1: Trend in Quarterly Electricity Generation Since June 2019 – September 2021

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

Rise in Electricity Price Index Led by Increased Power Prices

As per Stats.NZ, the rise in electricity prices drove a 3.0% rise in prices paid by producers and a 2.6% rise in prices received for production in the June 2021 quarter versus March 2021 quarter. Prices paid by electricity and gas supply producers increased 17.0% in the June 2021 quarter, while prices received for production rose 14.3%. The prices paid by the industry (input prices) are a little below the record level reported in 2008, while the prices received by the industry (output prices) have peaked in the series.

Exhibit 2: Trend in Electricity and Gas Supply Industry Price Indexes

Data Source: This work is based on/includes Stats NZ’s data which are licensed by Stats NZ for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Created by Kalkine Group

Decreased Annual Emissions for All Except Two Industries Due to COVID-19

As per Stats.NZ, NZ’s greenhouse gas (GHG) emissions decreased 4.5% (3,815 kilotonnes) in the year ended March 2021, indicating the impact of COVID-19. During the same period, the NZ economy emitted 80,552 kilotonnes of GHGs, reflecting the lowest annual amount in seven years and 4.5% below the high of 84,367 kilotonnes in the previous March. Industries that saw the largest decrease in emissions in the March 2021 year are transport, postal, and warehousing, down 49% (2,839 kilotonnes); manufacturing, down 7.2% (833 kilotonnes); and agriculture, forestry, and fishing, down 1.2% (524 kilotonnes).

Proposal to Increase the Use of Biofuels in Aotearoa New Zealand

The government is discussing a proposal to boost the use of liquid biofuels in NZ to decrease greenhouse gas (GHG) emissions from transport. The finding from this study will ensure a planned transition to a zero-carbon economy and economic development opportunities. Further, it will continue to support NZ’s freight network’s sustainability and efficiency and reshape the energy ecosystem to be more renewable, affordable, and secure, in addition to creating new jobs and developing the high-skill workforce.

Rise in Average Residential Expenditure on Electricity

As per MBIE, the average residential expenditure on electricity increased 6.3% YoY to $696 in September 2021 quarter, driven by a rise in electricity consumption per household by 3.5% YoY to 2,386 kWh. The nominal residential cost of electricity (including GST) increased 2.7% YoY to 29.16 c/kWh, contributed by a rise in lines component by 4.5% YoY to 11.12 c/kWh and energy & other components by 1.7% YoY to 18.05 c/kWh. This uptick in electricity consumption and pricing indicates economic recovery is on its way, driven by a revival in demand.

Exhibit 3: Trend in Nominal Quarterly Average Electricity Cost

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 ~12.77% versus ~-0.40% by the S&P/NZX 50 Index. Therefore, NZX All Energy Index overperformed NZX50 Index by ~13.17% in 1-year.

Exhibit 4: S&P/NZX All Energy (Sector) vs S&P/NZX50 Index

Source: REFINITIV

Key Risks and Challenges:

The Government is considering measures to control climate change. One of the measures was banning new low and medium-temperature coal-fired boilers and connecting with the private sector to help it transition away from fossil fuels. This measure will reduce NZ’s emissions profile and provide a phenomenal boost to the clean energy sector. The Government is also planning to phase out coal boilers by 2037. In line with this, attention is on how to phase out other fossil fuels in existing sites through re-consenting processes and best practice requirements in a National Environment Standard.

Exhibit 5. Key Risks in Utilities & Energy Sector:

Sources: Analysis by Kalkine Group

Outlook:

As per the government, the operators anticipate a fall in oil production soon, followed by a gradual decline. In addition, operators expect a sharp rise in gas production soon, reaching a peak in 2024, mainly led by drilling campaigns at Pohokura in 2022/23 and Maui and the continuing developments at Turangi, Mangahewa and Maui. Further, the privately-owned renewable energy company Lodestone stated plans to roll out 229 megawatts of solar capacity in the next 4-year at a project cost of $300 million. This project is forecasted to generate up to 400 gigawatt-hours per year and sell directly into the wholesale market.

Apart from the sector-specific factors, we have also analysed four NZX-listed companies operating in the same sector. This report covers their insights, outlook, performance and potential as expected to be delivered in the near to medium term.

1) Genesis Energy Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZ$2.97 billion, Gross Dividend Yield: 7.921%)

Business Description:

Genesis Energy Limited (NZX: GNE) is a New Zealand based diversified energy company, which sells LPG, electricity, and reticulated natural gas via the retail brands of Energy Online and Genesis Energy.

Outlook

The company has guided achieving EBITDA in the range of $420-$440 million for FY22. The company estimates its capital expenditure to remain up to $95 million for FY22. Concerning its Future-gen strategy, the company has committed to three major power purchase agreements (PPAs) and declared a plan to co-develop 500 MW of solar. The first PPA, Waipipi Wind Farm was completed in March and is expected to deliver 455 GWh of renewable energy in FY22. Moreover, it has signed 20-year PPA with Tilt Renewables for a 75 MW wind farm in Northland, which is expected to be completed by early 2024.

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

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation

The stock has been valued using an EV/Sales multiple-based illustrative relative valuation, and the target price so arrived reflects a rise of low double-digit (in % terms). Accordingly, a slight discount has been applied to EV/Sales Multiple (NTM) (Peer Average), considering decline in customer demand in the retail segment by 6.0% YoY in Q1FY22, due to the COVID lockdown and warmer winter conditions.

For relative valuation, peers like Mercury NZ Ltd (MCY.NZ), Meridian Energy Ltd (MEL.NZ), and Origin Energy Ltd (ORG.AX), among others, have been considered.

Considering the factors above, the current trading levels, and the associated business risks, we give a “Buy” recommendation on the stock at the closing market price of $2.85 per share, down 1.04% as of 16^th December 2021.

2) NZ Windfarms Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZ$66.26 million, Gross Dividend Yield: 4.546%)

Business Description:

NZ Windfarms Limited (NZX: NWF) is engaged in the wind farm business as it is a specialist wind farm owner and operator. The company makes revenue from the sale of electricity generated from its Te Rere Hau wind farm.

Outlook

As per the release date 16 December 2021, the company’s Board announced a 0.15 cents per share unimputed dividend to be paid on 31 December 2021. EBITDAF in FY22 is forecasted to remain slightly above FY2021, primarily due to the elevated forward prices when the fixed price variable volume contracts were executed. More clarity on the FY2022 EBITDAF guidance range will be provided with the H1FY22 result in February 2022 or if a material event occurs. Broadly, the company and consenting team will continue to consult with affected parties and assess environmental effects for the repowered wind farm with other continuing efforts.

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation

Considering the factors above, along with its current trading levels and the associated business risks, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.225 per share as of 16^th December 2021 (New Zealand Time: 12:26 PM (GMT +12).

3) Mercury NZ Limited (Recommendation: Hold, Potential Upside: Low Double-Digit) (M-Cap: NZ$8.26 billion, Gross Dividend Yield: 3.952%)

Business Description:

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

Outlook

The management has guided achieving EBITDAF of $590 million in FY22 driven by higher earnings from the Turitea wind farm and the benefit of recently acquired Tilt Renewables’ New Zealand assets, and the impact of the company’s Thrive programme. Further, the company expects to provide a fully imputed ordinary dividend of 20.0cps in FY22, a growth of 17.6% over FY21.

On 16 December 2021, the company welcomed the High Court’s decision to approve the Tauranga Energy Consumer Trust’s (TECT) proposed restructure of its Trust Deed by its trustees, which is expected to be completed in the first half of 2022, following the implementation of the TECT Trust Deed restructure.

On 19 October 2021, the company released its quarterly operational update for the three months ended on 30 September 2021. Hydro generation in Q1FY22 stood at 953GWh, below average, as Waikato catchment inflows remained below average at the 34th percentile. However, the company lifted Lake Taupo hydro storage at 403GWh, 45GWh above average. Further, the customer numbers maintained at 328,000, primarily due to market share. It completed the acquisition of Tilt Renewables NZ wind farms while the commissioning of Turitea is underway.

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

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation:

The stock has been valued using an EV/Sales multiple-based illustrative relative valuation, and the target price so arrived reflects a rise of low double-digit (in % terms). A slight discount has been applied to EV/Sales Multiple (NTM) (Peer Average), considering below average hydro generation in Q1FY22 and slight uptick in debt to equity in FY21 at 0.36x versus 0.35x in FY20.

For relative valuation, peers like Trustpower Ltd (TPW.NZ), Vector Ltd (VCT.NZ), and Origin Energy Ltd (ORG.AX), among others, have been considered

Considering the fact above, we give a “Hold” recommendation on the stock at the closing market price of NZ$6.06 per share, up 1.42% as of 16^th December 2021. 

4) Vector Limited (Recommendation: Hold, Potential Upside: Low Double-Digit) (M-Cap: NZ$3.99 billion, Gross Dividend Yield: 4.644%)

Business Description:

Vector Limited (NZX: VCT) is a network infrastructure company that distributes energy and communication services across Australasia. Further, it has established itself as a top player in the electricity and gas network distribution in New Zealand.

Outlook

The company expects the growth in the electricity and gas connections to sustain. Further, it forecasts a high level of capex to prevail owing to high connection growth in Auckland and advanced meter deployments in Australia and New Zealand, roll out of 4G modems, and advanced gas meters in New Zealand.

On 18 November 2021, the company announced unsubordinated fixed-rate bonds (Bonds) of NZ$225 million in the bookbuild process with the condition of oversubscriptions of NZ$25 million at an interest rate of 3.69% per annum. The Bonds was issued on 26 November 2021 and will mature on 26 November 2027.

On 21 October 2021, the company released operational performance for the three months ended on 30 September 2021. It reported 592,962 electricity network connections, up 1.7% YoY and 116,840 gas network connections, up 2.0% YoY. Also reported 8.5% YoY growth of advanced meter fleet (total of 1,895,550 now installed across Aus/NZ) and over 420,000 advanced meters now installed in the Australian market.

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

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation

The stock has been valued using an EV/Sales multiple-based illustrative relative valuation, and the target price so arrived reflects a rise of low double-digit (in % terms). A slight discount has been applied to EV/Sales Multiple (NTM) (Peer Average) as the stock is trading at higher multiple versus closest peers and persistence risk associated with changing climate policies and regulation requirements.

For relative valuation, peers like Mercury NZ Ltd (MCY.NZ), Meridian Energy Ltd (MEL.NZ), Trustpower Ltd (TPW.NZ), among others, have been considered.

Considering the factors above and the closing trading levels, we give a “Hold” recommendation on the stock at the closing market price of NZ$3.99 per share, down 0.99% as of 16^th December 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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