Trustpower Limited

Company Overview: Resilient Power and Telecom Service Provider, Trustpower Limited (NZX: TPW), is an electricity generator and energy retailer. It supplies gas and telecommunications services to its New Zealand customers as part of its multi-product retail business. Its customer base is impressive with around 266,000 electricity customer connections, around 40,000 gas customer connections and, around 100,000 telecommunications customer connections. It offers a range of landline voice services along with a range of internet plans with options, including Ultra-Fast Broadband and broadband. Its generation activities are undertaken in both Australia and New Zealand, while its retail operations are undertaken in New Zealand.

TPW Details

Electricity Demand is Expected to Rise as Business Activities Are Resuming:  Trustpower Limited (NZX: TPW) is primarily engaged in the ownership and operation of electricity generation facilities from renewable energy sources and the retail sale of energy and telecommunications products to its customers. It has a market capitalization of ~$2.163 billion as on September 21, 2020.

In the financial year 2020, the company continued to build capability and strength in the business on the back of a high-quality customer base, growing bundled retail business, and strategy to grow and enhance its portfolio of small-scale, localised, and renewable generation schemes. The financial year 2020 also witnessed the launch of wireless broadband (WBB); development of mobile capability; significant overhauls and upgrades to TPW’s generation schemes; and continued gains in digitisation and automation which have improved the customer experience and reduced both operating, and cost to serve.

Looking at the past performance over FY16 to FY20, the top line and bottom line of the company grew at a compounded annual growth rate (CAGR) of 2.28% and 9.57%, respectively. The total revenue improved from $904.7 million in FY16 to $989.9 million in FY20, and its bottom line improved from $68 million in FY16 to $98 million in FY20.

Historical Performance (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 80.03% of the total shareholding. Infratil Ltd and Tauranga Energy Consumer Trust are holding a maximum stake in the company at 51.04% and 26.80%, respectively, as provided in the table below:

Top 10 Shareholders (Source: Refinitiv (Thomson Reuters))

A Quick Look at Key Metrics: The company’s net margin stood at 9.9% in FY20, which is higher as compared to the figure of FY19 of 9.0%, thus, it can be said that TPW has been able to manage its operating and non-operating costs more efficiently. RoE of TPW in FY20 stood at 8.3% against the industry median of 5.5% and therefore, it can be said that the company has delivered better returns to its shareholders than its peers.

Key Metrics (Source: Refinitiv (Thomson Reuters))

A Look at Q1FY21 Performance: The company in its Q1FY21 report highlighted that Trustpower retail market activity was materially reduced during level 4 lockdown, underpinned by a decrease in total utility accounts across the quarter (down ~2,000). Due to increased working from home and colder weather, mass-market customer electricity demand was up whereas C&I demand was materially lower than the same period last year due to a slower return to normal, and the loss of some ICP in this space. There was increase in total data usage which grew by 81% compared to the pcp, over increased working-from-home, lockdown, and increased telco customers.

Wholesale Electricity Market Data (Source: Company Reports)

Retail Data (Source: Company Reports)

FY20 NPAT Better Than the Previous Year: The net profit after tax (NPAT) of $97.6 million for FY20 (ended March 31, 2020) was broadly in line with last year’s NPAT of $92.7 million. However, this year includes a one-off gain of $16.4 million resulting from the sale of legacy meter business. Underlying profit after tax was $75.5 million or 26% below last year. Earnings Before Interest, Tax, Depreciation, Amortisation and Fair value movements in financial Instruments (EBITDAF) was $186.4 million or 16% below last year’s EBITDAF of $222.2 million. The result of Trustpower Limited was affected by many factors like a decrease in rainfall which caused lower generation production, material plant outages, accounting changes, costs of developing capability, and restraint in pricing changes. The Board of Directors declared a final dividend of 15.5 cents per share, fully imputed, delivering a total ordinary dividend to shareholders of 32.5 cents per share for FY20.

FY20 Income Statement (Source: Company Reports)

Company Outlook: As per the release, EBITDAF for FY21 is expected to be between $190 million - $215 million. Rio Tinto would wind-down operations at New Zealand Aluminium Smelters Limited (NZAS) with expected closure in August 2021. TPW believes that with its geographically dispersed generation schemes and customer bases, it is well placed to mitigate any negative impact arising out of NZAS exit. The company has highlighted that it has sufficient capacity to store water for extended periods until demand increases.

Key Valuation Metrics (Source: Refinitiv (Thomson Reuters))

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

EV/EBITDA Multiple Based Relative Valuation (Source:  Refinitiv (Thomson Reuters))

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

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.

Despite the stronger closing during the previous week, the stock on the first trading session of the ongoing week remained very volatile and finally gave lower close at $6.91 which is marginally lower than 20 periods SMA reading of $6.93. The technical indicator RSI with around 50 readings and curve at the end pointing down suggests the softening of bullish momentum for the stock.

Going forward, the stock may have resistance around $7.60 whereas support could be around $6.80.

Stock Recommendation: The company is well-positioned to grow and prosper in a changing and evolving environment, underpinned by high-quality customer base, strategic investments and operational improvements. Moreover, the long-term outlook of the utility segment remains positive and expected to drive growth once the economy starts moving on the path of recovery, more resiliently.

Considering the aforesaid facts, recent updates and FY20 results, we have valued the stock using EV/EBITDA Multiple Based Relative Valuation (on an illustrative basis) and the target price reflects a rise of lower double-digit (in % terms).

Hence, we give a “Buy” recommendation on the stock at the current market price of NZ$6.910 per share, down by 2.68% on September 21, 2020.

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

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