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Morningstar | Normalising Rainfall Brings Trustpower's 1H19 Earnings Back to Earth

Narrow-moat Trustpower reported first-half fiscal 2019 EBITDA down 15% to NZD 130 million as lower rainfall sees hydroelectric output fall from last year's abnormally high levels. Nonetheless, the firm's earnings are tracking marginally ahead of our prior expectations as hydrogeneration was 6% above average in the half, which offset an unexpected increase in retail operating costs. We marginally increase our fiscal 2019 EBITDA forecast to NZD 227 million, near the middle of guidance, and maintain our fair value estimate of NZD 5.90 per share. At current prices, Trustpower is fairly valued.

With a strong balance sheet after selling Australian hydroelectric assets, directors decided to declare a special, unimputed dividend of NZD 25 cents per share in addition to an ordinary, fully imputed dividend of NZD 17 cps. Going forward, ordinary dividends are expected to remain around current levels despite the loss of earnings from the divested Australian assets, requiring a higher payout ratio. Net debt/EBITDA was 1.9 times at Sept. 30 and should rise to around 2.4 times after dividends are paid in December. We consider this reasonable, being broadly in line with major New Zealand peers. Management plans to increase net debt/EBITDA to between 2.5 and 2.8 times, preferably by making a bolt-on acquisition in the retail space. However, if a suitable acquisition can't be found by mid-2019, another special dividend will be considered.

Generation EBITDA fell 15% to NZD 108 million on a 12% fall in hydrogeneration and lower wholesale prices, partly offset by lower hedging costs. Hydro storage is well below average for this time of year, suggesting wholesale prices will remain elevated and volatile, which should start flowing through to retail prices, benefiting group earnings.

Retail EBITDA fell 6% to NZD 28 million as higher staff and other costs offset revenue growth. Automation continues to aid cost efficiency improvements, but it appears the low hanging fruit has been picked. The increasing share of telecommunications customers, which are more time-consuming to serve, is also adding to cost growth. The bundled offering continues to support growth in customer numbers, which rose 2% over the past year. Retail competition remains intense, though at least that should reduce the risk from the government's electricity price review.