EUR 850.00 For Business Accounts Only

Morningstar | Mercury's Flat First-Half EBITDA Buoyed by High Prices Amid Lower Rainfall. See Updated Analyst Note from 26 Feb 2019

We retain our NZD 3.60 fair value estimate for Mercury NZ following first-half fiscal 2019 results that were roughly in line with our expectations. The firm reported flat EBITDA at NZD 302 million for the six months to December 2018, compared with NZD 304 million in the prior corresponding period. This was achieved despite significantly lower hydro generation as higher prevailing spot prices lifted profits in the generation segment. The firm maintained fiscal 2019 EBITDA guidance of NZD 515 million. We lower our full-year forecast by 1% to NZD 514 million on lower generation expectations, but our long-term thesis is intact. While cycling high rainfall in fiscal 2018 will be a headwind in the short term, energy price rises should lead to stronger generation earnings, driven by the low-cost hydro and geothermal generation assets underpinning the narrow economic moat. Last trading at NZD 3.60, Mercury shares screen as fairly valued.

Total generation volume in the half fell 5% to 3,901 gigawatt hours. Cycling bumper rainfall in the year-ago period, hydroelectric volume of 2,448 GWh was 9% lower over the half. Somewhat offsetting this was slightly higher geothermal generation, up 40 GWh on marginally higher availability. We expect a little less than 7,000 GWh in generation in fiscal 2019, 9% lower than the record generation in the prior corresponding period.

Offsetting lower generation volume over the half, the price received for generated electricity averaged 53% higher at NZD 138 per megawatt hour. The higher wholesale price is a tailwind for the generation segment but a headwind for the retail segment, manifesting in increased costs. The retail industry remains highly competitive, and unlike the generation segment, we do not see energy retailing as moaty. Illustrating the lack of competitive advantages in the segment is the difficulty in passing through increased costs as competition keeps pressure on retail prices.

Mercury remains long generation--meaning that the company generates more energy than it sells to retail customers. This leads to higher wholesale prices as a net positive for the firm. We continue to forecast roughly flat EBITDA over the next five years to fiscal 2023. We expect normalising hydroelectricity generation to offset higher wholesale energy prices from modest demand growth.

A dividend of NZD 6.2 cents per share, fully imputed for New Zealand shareholders, was declared. Management also confirmed full-year dividend guidance of NZD 15.5 cents per share, in line with our unchanged forecast. The sale of Metrix, Mercury's smart metering company, is due to complete in March and will result in a cash windfall of NZD 270 million. Initially, the proceeds will be used to deleverage the balance sheet. We forecast fiscal 2019 net debt/EBITDA at around 1.8, down from 2.3 in fiscal 2018. This is more conservative than peers and provides Mercury with the financial firepower for further investment in core generation and retail assets.