Trustpower Limited

Company Overview: 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. It has approximately 266,000 electricity customer connections, approximately 40,000 gas customer connections and approximately 100,000 telecommunications customer connections. It offers businesses a range of landline voice services and also provides a range of Internet plans with options, including Ultra-Fast Broadband and broadband. The Company's generation activities are undertaken in both New Zealand and Australia, whilst its retail operations are undertaken in New Zealand.

TPW Details

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. The market capitalisation of the company stood at ~$2.2 billion on 31^st January 2022.

Looking at the past performance over FY17 to FY21, the top line of the company grew at a compounded annual growth rate (CAGR) of 0.34%. Total Revenue of the company improved from $939.9 million in FY17 to $952.8 million in FY21.

Exhibit 1: Financial Statistics

Source: Analysis by Kalkine Group

Result Performance (H1FY22 Ended 30 September 2021)

• EBITDAF up 11%: Trustpower delivered an 11% increase in total operating earnings (EBITDAF) to $122.2 million, rising from $110.4 million in H1FY21. An increase in generation volumes at 1,000 GWh, up from 945 GWh from the previous year, significantly contributed to an increased earnings.
• NPAT up 243%: Net profit after tax for H1FY22 was $115.1 million for the period, a significant increase of 243% on H1FY21. This was mainly due to a non-cash fair value gain on financial instruments. Notably, underlying earnings, which exclude fair value gain on the financial instruments, were $59 Mn for the 6 months ended 30^th September 2021, up from $52.7 Mn in the prior period driven largely by the higher generation volumes as well as wholesale prices.

Results Performance (Year Ended 31 March 2021)

Trustpower recorded a strong performance in both retail and generation in FY21, which contributed to the company’s positive results. After facing a difficult 2020, TPW delivered an operating earnings EBITDAF of $200.2 million, a 7% increase from FY20. 

With the introduction of mobile to the company’s bundled product offering, retail earnings increased 33% on the previous year, from $35.3 million to $47 million.

Top 10 Shareholders:

The top 10 shareholders as highlighted in the chart below, together forms around 79.07% of the total shareholding. Infratil Limited and Tauranga Energy Consumer Trust are holding a maximum stake in the company at 51.04% and 26.8%, respectively, as provided in the table below:

Exhibit 2: Top 10 Shareholders

Source: Analysis by Kalkine Group

A Quick Look at Key Metrics:

The company has posted net margin of 38.9% in H1 FY 2022 as compared to the industry median of 16%. It has posted ROE of 10.2% in H1 FY 2022 as compared to the industry median of 3.9%. Therefore, it could be said that the company has delivered decent returns to its shareholders.

Exhibit 3: Key Metrics

Analysis by Kalkine Group

Recent Updates:

On 13 December 2021, the company announced the appointment of Rob Buchanan as General Manager, Growth and Trading. Rob’s extensive investment banking experience of 18 years and existing understanding of the company will be vital in helping Trustpower grow its renewable energy portfolio and wholesale business.

Also, TPW announced that Peter Calderwood would be stepping down from the role of General Manager, Strategy and Growth, effective 31^st January 2022.

Outlook:

Trustpower has retained its expectation of FY-22 EBITDAF of between $210-$225 Mn (excluding the costs of selling the retail business of ~$9 Mn). This estimate is made up of ~$165 – $175 Mn from the continuing operations, as well as ~$45 - $50 Mn from the discontinued operations. TPW anticipates the FY 2022 capex of between $34 Mn -$44 Mn. In Q3 FY 2022, the retail segment showed steady momentum despite the impact of COVID-19 pandemic. Also, mobile connections continued to grow.

Risks:

The company is exposed to credit, market, and liquidity risk that arises in the normal course of the business. The company is also prone to the risks related to the COVID-19 pandemic. TPW operates in a highly competitive environment. A decrease in market share could affect its business.

Valuation Methodology: Price/Earnings Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

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

Stock Performance:

The utility industry has a strong long-term outlook and is expected to continue to drive growth as the economy returns to normal. Trustpower is resilient and is well-positioned to grow, as a result of its strategic initiatives and investments.

The stock has been valued using P/E multiple-based illustrative relative valuation and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to Price/EPS Multiple (NTM) (Peer Average) considering the decent outlook as well as expectations of the higher electricity demand over the long-term.

Considering the aforementioned facts and its current trading levels, we give a “Buy” recommendation on the stock at the current market price of NZ$7.040 per share, up by 0.28% on 31^st January 2022.

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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