Morningstar | Contact Finishes the Year Strongly; No Change to FVE
Narrow-moat-rated Contact Energy finished the year relatively strongly on improved hydroelectric output, leading us to upgrade our fiscal 2018 EBITDA forecast 2% to NZD 490 million. Our longer-term forecasts are largely unchanged and we maintain our NZD 6.20 fair value estimate. At current prices, Contact appears marginally undervalued, offering an attractive 6.4% fiscal 2019 dividend yield, mostly imputed for New Zealand residents.Fiscal 2018 operating statistics show competition remains tough in the retail division. Customer numbers were down 0.6%, mass market electricity sales volumes fell 1.4% and commercial and industrial volumes fell 6%. All despite 0.8% growth in nationwide electricity demand. However, 1.7% growth in average electricity prices, 18% growth in gas sales and ongoing reductions in the cost to serve customers helped netback--a measure of retail profitability--remain broadly flat at NZD 86.91 per megawatt hour. Retail conditions are likely to remain tough for the medium term, though a higher and more volatile wholesale electricity price should improve the competitive position of the major players compared with small, pure-play retailers.
The generation division also faced headwinds, mainly lower rainfall hurting hydroelectric output in the first half. Hydro generation was down 21% in the first half, so ending the fiscal year down just 2.3% at 3,479 gigawatt hours, or GWh, is a good result. Geothermal generation increased 2.8% and thermal generation increased 4%, helping total generation increase 0.9%. Looking forward, we forecast hydroelectric generation increases back to the long-run average of 3,900 GWh over the next two years, a key driver of group earnings growth. Lake storage at Clutha sits at 57% of average for this time of year, suggesting headwinds continue for now. Nonetheless, an eventual return to average hydro generation should improve earnings by close to NZD 20 million per year by displacing more costly gas-fired power.
Contact Energy sell electricity, gas and liquefied petroleum gas (LPG) products and services to residential, small business, commercial and industrial customers. Co. has two operating segments: Integrated Energy, which is a generator of electricity and a purchaser and retailer of electricity and natural gas to customers throughout New Zealand; as well as Other, which consists of other products and services provided by Co., which includes the sale of LPG.
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