Morningstar | Trustpower Looks Fairly Valued
Narrow-moat-rated Trustpower remains fairly valued, trading close to our unchanged NZD 5.90 fair value estimate. Fiscal 2019 has started a little softer than last year, with lower hydro generation and stiff retail competition, broadly in line with our expectations. We maintain our forecasts and fair value estimate. We forecast EBITDA falls 9% in fiscal 2019 to NZD 220 million, towards the top of management's guidance of NZD 205 million-NZD 225 million. The fall is mainly on reversion to mean rainfall causing reduced hydroelectric output and the sale of Australian assets. The partial loss of "avoided cost of transmission" revenue is also a negative for earnings in coming years. But the firm's balance sheet is strong following the asset sales, with net debt/EBITDA at a conservative 2 times, and earnings should start growing again over the longer term. In the meantime, the firm offers an attractive imputed dividend yield of 5.8% at the current share price.In the June quarter 2018, Trustpower's electricity sales volumes fell 1.4% because of some commercial customer losses. This isn’t a major concern, as higher-margin mass-market sales increased 2.5%. Additionally, the firm continues to increase telecommunication and gas connections.
Generation performance is coming back to earth after a period of strong outperformance. For the June quarter, hydroelectric volumes were down 4% on the same quarter last year, but remain 14% above the long-run average. North Island generation volumes fell 12%, partly offset by a recovery in the South Island, where volumes rose 6%.
Nationwide electricity demand seems to be rising gradually, led by the residential and dairy sectors. The Tiwai Point Aluminium smelter's decision to increase production should add another 1% to annual electricity demand.
Trustpower is an electric power generation and retail group based in New Zealand. Co. and its subsidiaries are engaged in the development, ownership and operation of electricity generation facilities from renewable energy sources and the retail sale of electricity and telecommunications services to its customers. Co. owns and maintains 36 small to medium size Hydro Generating Stations and two Wind Farms, with a further Wind Farm in South Australia. Co. is engaged in the production of electricity from renewable sources and its power stations produce enough electricity for around 220,000 New Zealand households.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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