EUR 850.00 For Business Accounts Only

Morningstar | Trustpower Is on Track for Another Solid Year

Narrow-moat Trustpower’s earnings are likely to be down modestly on last year as less rainfall results in lower hydroelectric production. Nonetheless, we expect a good result towards the top of fiscal 2019 EBITDA guidance of NZD 215 to 235 million. Our NZD 231 million forecast represents a mid-single-digit percent decline on fiscal 2018. We remain comfortable with our NZD 5.90 per share fair value estimate and consider the stock fairly valued at current prices.

In the fiscal year to date, Trustpower’s generation is down high-single-digits percent on the previous corresponding period, which benefited from abnormally high rainfall. This is the main cause of lower earnings this year, but it isn’t a major concern. Rainfall, and thus hydroelectric generation, can be volatile but our valuation is based on long-run averages.

Lower generation sees the firm reduce sales to low-margin commercial and industrial, or C&I, customers, which were down 7% in the nine months to December 2018. Electricity sales to mass market and small business customers were flat.

On the positive side, wholesale electricity prices surged higher in the December quarter because of gas supply shortages and below-average lake storage, and the firm was able to increase generation during this period to capitalise. Higher spot and futures prices lay a good foundation for retail price increases, particularly for C&I customers.

Trustpower’s bundled product offering continues to drive growth, though at a slowing rate. Despite falling electricity connections, total utility connections increased 1.3% in the past year and 4.2% over the past two years. Telecommunication and gas connections rose 9% and 3%, respectively, in the past year and 27% and 9% in the past two years. As well as boosting revenue, bundling reduces customer churn and leads to lower costs to retain customers.

Cost savings, as well as improved customer experiences, should also come from IT investment to improve systems and shift more customers to digital interactions.

Nationwide electricity demand remains flat, but early signs suggest modest growth over the medium term. Wholesale prices have become a lot more volatile in recent years because the tighter demand/supply balance means supply issues have a bigger impact. Government agencies have bullish electricity demand outlooks, as more electricity will be needed to help reduce industrial and transport demand for fossil fuels. The major “gentailers” are likely to start building new generation assets in coming years. In contrast to the prior investment splurge which created oversupply and depressed electricity prices, we expect a lot more discipline given lessons learned and greater scrutiny as listed companies.