Morningstar | Genesis Remains Overvalued
Genesis' high-quality renewable generation assets, which underpin the firm's narrow economic moat, have enjoyed strong North Island rainfall in recent times. We expect EBITDA in 2019 of NZD 361 million--in line with management's guidance for NZD 350 million to NZD 370 million. But we expect normalising hydrology conditions to weigh on longer-term earnings. We also have concerns about the firm’s exposure to oil and gas prices, as well has higher financial leverage than peers. Our fair value estimate of NZD 2.20 remains intact, and last trading at NZD 2.59, shares in Genesis are overvalued.Genesis should continue to benefit from its low-cost hydroelectric generation assets over the longer term. However, we expect generation levels to fall to more typical levels as North Island rainfall reverts to the long-term mean. Further, we expect the Kupe oil and gas field to be largely depleted in a decade, leaving a significant hole of about a quarter of the firm's earnings. Management has targeted fiscal 2021 EBITDA of NZD 400 million to NZD 430 million. We think they can achieve this, with our forecast of NZD 406 million in EBITDA by fiscal 2021.
Despite shares currently trading above or fair value estimate, Genesis still offers an attractive dividend yield of 6.7%, but the firm's balance sheet is stretched. Forecast fiscal 2019 net debt/EBITDA of close to 3 times is well above peers. However, we expect credit metrics to improve relatively quickly on earnings growth and the dividend reinvestment plan. We forecast net debt/EBITDA to be at more comfortable levels below 2.5 times within a couple of years.
Genesis Energy Limited is an energy company involved in the generation of electricity, retailing and trading of energy, and the development and procurement of fuel sources. The Company operates through four segments: Customer experience, Energy management, Oil and gas, and Corporate. The Customer experience segment is engaged in supplying of energy (electricity, gas and liquefied petroleum gas (LPG)) and related services to end user customers. The Energy management segment is engaged in the generation and trading of electricity and related products. The segment includes electricity sales to the wholesale electricity market, derivatives entered into to fix the price of electricity, and wholesale gas and coal sales. The Oil and gas segment is engaged in the exploration, development, production and sale of gas, LPG and light oil. The Corporate segment is engaged in new generation investigation and development, fuel management, information systems and property management, among others.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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