Morningstar | Contact Is Having a Good Year; Fair Value Estimate Increases 4%. See Updated Analyst Note from 23 Apr 2019
Contact Energy is having a good fiscal 2019, with earnings tracking comfortably above last year. We increase our fair value estimate for Contact Energy 4% to NZD 6.50 per share on the time value of money and slightly improved medium-term expectations for electricity prices as market conditions continue to improve. Storage levels in the North Island remain low, at around 60% of mean, allowing South Island-based Contact to benefit from elevated electricity prices. Contact's hydro generation assets enjoy cost advantages and efficient scale, which underpin the firm's narrow economic moat. Contact continues on track to deliver a significant uptick in hydroelectric generation in fiscal 2019 compared with the dry start to fiscal 2018. Last trading at NZD 6.74, shares in Contact screen as roughly fairly valued.Hydro generation of 3,010 Gigawatt hours, or GWh, for the nine months to March 2019 is nearly 25% higher than the prior corresponding period. However, we expect the effect over the remaining three months of fiscal 2019 to be less pronounced, cycling a strong finish to fiscal 2018. We forecast hydroelectric generation for fiscal 2019 of 4,100 GWh, around 17% higher than fiscal 2018 and 5% higher than the historical average.
With the firm's Clutha catchment at 89% of mean storage, Contact is relatively well places going into the fourth quarter, allowing it to benefit from still high wholesale electricity prices. Hydro generation is expensive to build but cheap to run. Following an extended dry period, normalising rainfall has allowed the firm to better utilise its moaty generators, leading to our forecast of fiscal 2019 EBITDA of NZD 535 million--11% higher than the prior corresponding period.
The retail business is not performing as strongly, but this isn’t a major concern as it contributes much less earnings than the generation business. Mass market electricity sales are down 2.4% in the fiscal year to date, with customer numbers down 2% since March 2018 because of intense competition. Retail gas sales are doing better, up 8% year to date.
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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