EUR 850.00 For Business Accounts Only

Morningstar | MEZ Updated Star Rating from 15 Jul 2019

Narrow-moat Meridian finished fiscal 2019 in style. Based on the firm’s monthly operating statistics, we estimate fiscal 2019 EBITDA is up 25% on last year to NZD 831 million. This is a fantastic result, driven primarily by strong growth in hydroelectric volumes, wholesale electricity prices, commercial and industrial revenue and retail customer connections. Looking forward, earnings are likely to fall around 7% in fiscal 2020 on normalisation of rainfall and lower wholesale electricity prices. However, some positives will continue, keeping EBITDA comfortably above the five-year historical average of NZD 635 million.

We upgrade fiscal 2019 EBITDA by 5% and make modest upgrades to longer-term forecasts. Our fair value estimate increases 3% to NZD 3.60 per share. At current prices, Meridian is overvalued. Its share price is up more than 50% since late 2018, more than factoring in improving earnings. Much of the share price rally likely stems from the global search for yield.

Meridian generated 13,570 Gigawatt hours, or GWh, of power in fiscal 2019, up 8% on last year thanks to a 9% improvement in hydroelectric production to 12,326 GWh. Wind volumes fell 2% to 1,244 GWh. Wholesale electricity prices spiked in October last year on gas supply shortages and poor rainfall. While electricity prices have been falling, they remain strong. Meridian received an average price of NZD 95 per Megawatt hour in June and NZD 123 per MWh in fiscal 2019. Generators make good money at current prices, which means new wind farms and geothermal power stations are likely to be built. We expect Meridian and peers to be more disciplined than last time new supply was built, several years ago. As such, we don’t expect another period of oversupply and depressed wholesale electricity prices.

Meridian’s Waitaki lake storage in the South Island at the end of June was 121% of the average for this time of year, a good tailwind for hydroelectric production in fiscal 2020.

Current Waitaki storage is enough to produce 1,931 GWh of electricity.

In contrast to plentiful South Island storage, North Island storage is at 73% of average, which could limit North Island generation and support wholesale electricity prices. But weather is fickle. It was only a couple of years ago that the South Island hydroelectric schemes suffered from dry conditions while North Island generators benefitted from strong rainfall and wholesale electricity prices. We focus more on long term averages.

Fiscal 2019 retail electricity sales volumes rose 4% to 6,240 GWh, with residential and small business volumes up 2.1% and corporate volumes up 8.3%. New Zealand customer accounts grew 4% in fiscal 2019, continuing the solid uptrend since early 2017 thanks to growth in the North Island and in Meridian’s alternative brand, Powershop.

Sales to commercial and industrial customers, including New Zealand Aluminium Smelter, were a key driver of earnings growth in fiscal 2019. Volumes rose 3.5% to 7,550 GWh and the average price increased 16% to NZD 69.40. Further growth is likely in coming years as the average sales price remains well below wholesale electricity prices.