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Morningstar | Stronger Generation Drives Good 1H for Meridian

Narrow-moat Meridian Energy had a strong first-half fiscal 2019, as expected. EBITDA rose 18% to NZD 389 million and underlying NPAT rose 38% to NZD 144 million. The result was driven by strong increases in hydroelectric generation and wholesale prices. We make minor changes to near-term earnings forecasts but longer-term forecasts are largely unchanged. We maintain our NZD 3.20 fair value estimate and consider the stock marginally overvalued at current prices.

Meridian’s largest and “moatiest” business--New Zealand wholesale--was the star, with EBITDA up 24% to NZD 325 million on stronger generation volumes and prices. Hydroelectric generation was up 12% on improved rainfall and snowmelt compared with the drought-affected previous corresponding period, or pcp. Water inflows were 92% of average in the first half and storage in its main lakes is close to average for this time of year, suggesting hydroelectric volumes will be well supported in coming months. Meanwhile, the wholesale price of electricity increased sharply in the December quarter on depressed lake storage in parts of the country, gas supply issues which impacted gas-fired power stations, and increased electricity demand. Prices have since calmed down, but this episode shows New Zealand’s oversupply issues are largely in the past. This lays a good foundation for medium-term earnings growth through expansion and, hopefully, price increases.

The New Zealand retail business recorded a 24% fall in EBITDA to NZD 37 million on slightly lower sales volumes and prices. Customer numbers increased 2% as the firm aggressively pursues market share, but retail volumes were down because of lower agricultural demand. Management sees early signs of sustainable demand growth and Meridian is probably best placed to invest in new generation supply given its huge hydro storage capacity pairs well with intermittent, cheap to build wind farms. It also has the financial strength, with relatively conservative net debt/EBITDA of 2.2 times.

Australian EBITDA increased 14% to AUD 41 million on higher electricity generation following the acquisition of Green State Power. These small hydroelectric schemes contributed nearly a third of Meridian’s Australian power generation in the half, with the balance coming from wind farms. After growing strongly until fiscal 2017, electricity customer numbers have stagnated for the past couple of years. But with increased generation capacity, Meridian will try to accelerate growth in customer numbers through greater marketing efforts. Australian generation earnings face significant headwinds from recent falls in green energy credit prices and drought conditions impacting hydroelectric output. Nonetheless, the longer term outlook is relatively good.