EUR 850.00 For Business Accounts Only

Morningstar | Near-Term Water Woes Immaterial to Mercury's Intrinsic Value; Shares Fairly Valued

Following January's 50 Gigawatt hour, or GWh, cut in fiscal 2019 hydroelectric volume guidance to 4,150 GWh, continuing dry weather in Mercury's Taupo catchment has the firm again lowering hydro generation guidance. The new expectation of 4,000 GWh is in line with historical averages. We have lowered our near-term forecasts for the firm, but the change is immaterial to our unchanged fair value estimate of NZD 3.70 per share. Our long-term thesis remains intact. We expect Mercury to continue generating strong returns on capital as it utilises the low-cost, high-quality generation assets which underpin its narrow economic moat. Last trading at NZD 3.85, shares in Mercury screen as roughly fairly valued.

Third-quarter operating results revealed hydroelectric generation of 762 GWh, 26% lower than the unseasonably high generation in the prior corresponding period. Taupo storage is well below average levels, suggesting a weak fourth quarter. On the back of our new forecast fiscal 2019 hydroelectricity generation forecast of 4,000 GWh, we lower our EBITDA forecast from NZD 515 million to NZD 501 million--slightly above management's updated guidance of NZD 495 million.

We expect normalising hydro generation volumes to be offset by higher wholesale prices, underpinning our low-single-digit EPS growth forecast over the five years to 2023. Higher geothermal availability over the quarter somewhat offsets the shortfall in hydro generation. Geothermal generation was 12% higher at 710 GWh, cycling lower availability due to scheduled maintenance in the previous corresponding period.