Contact Energy Limited (NZX: CEN)

Contact Energy Limited (NZX: CEN) is an electricity generation company based in New Zealand. Predominantly, the company is an operator of a renewable portfolio of electricity generation assets. It has an ownership and operation of power stations and pertains to produce its electricity from their geothermal and hydro stations.

Rationale – Sell at NZD 9.15

• Profit Booking: CEN’s stock price has breached the R1 level suggested in the previous report published on 21 Nov 2023. Considering the market conditions and the price action, it is prudent to book profit on the stock.
• Lower Profitability: CEN’s gross margin was found to be lower than overall industry with actual figures of 37.9% in H1 FY24 vs industry median of 66.2%. Moreover, company’s net margin of 11.7% in H1 FY24 is lower as compared to industry’s median of 12.1%.
• Macroeconomic Risk: It is anticipated that real GDP growth would drop to 1.1 percent in 2024 before picking again in 2025. After peaking, inflation has decreased, and in Q3 of 2024, it is predicted to drop below 3%. Restrictive policy settings are what should be maintained. To combat structural problems and aid in the deflation of the economy, budget 2024 ought to have a strict budgetary posture.

Valuation

Share Price Chart  

CEN’s Daily Chart, Source: REFINITIV

On the daily chart, CEN prices are trading below the rising trendline resistance zone. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~53.73 level. However, the prices are trading below the trend-following indicator 21-period SMA, which may act as a resistance level. An important support level for the stock is placed at NZD 8.10, while the key resistance level is placed at NZD 9.50.  

Conclusion

Considering the risks associated, profitability trends versus industry median, and price action stance, a "SELL" recommendation on Contact Energy Limited (NZX: CEN) has been given at the closing market price of NZD 9.15 as on 05 July 2024.

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.