Morningstar | Contact Slims Down with Another Asset Sale; No Change to FVE
Narrow-moat Contact Energy sold its LPG business, Rockgas Limited, to Gas Services NZ, which also recently bought Contact's Ahuroa gas storage facility. GSNZ is an associate of First Gas Limited. Net proceeds should be around NZD 250 million after transaction fees and net debt adjustments, representing an enterprise value/fiscal 2018 EBITDA multiple of 7.8 times. We incorporate the asset sale, which should complete Dec. 31, 2018, into our forecasts. On a full-year basis, EBITDA falls by around NZD 32 million, or 6%, depreciation falls NZD 5 million, and interest expense falls NZD 15 million. The sale price seems fair and the rationale logical, but it doesn't impact our fair value estimate, which remains NZD 6.20. At current prices, Contact screens as slightly undervalued.The rationale for the sale is to streamline the business by getting rid of the complex LPG distribution and logistics activities. The firm can now focus on its core gentailer operations and speed up its digitalisation and cost-out initiatives. The sale also lessens risk by reducing debt and exposure to volatile wholesale LPG prices. We thought Contact already had a solid balance sheet after selling the gas storage facility, and now it looks very healthy with net debt/EBITDA likely to fall below 2 times in fiscal 2019. This puts the firm in a good position to pay generous dividends.
As part of the deal, Contact will enter an exclusive marketing arrangement with GSNZ to jointly offer each other's products to their customers. The companies will also collaborate on advertising. These arrangements will protect customer numbers and preserve the stickier customer base that comes with a multi-fuel offering. Additionally, Contact will maintain scale benefits and cross-sell opportunities by providing call centre and billing services for mass market LPG customers, for a payment of NZD 2 million from GSNZ.
Rockgas holds Contact's LPG operations, 50% of Rockgas Timaru Limited and 8.5% of Liquigas Limited. Rockgas Timaru is a joint venture with Alpine Energy and Liquigas is a provider of LPG storage, transport and logistics services in New Zealand.
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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