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Morningstar | Trustpower Reports In Line FY19 Result; FVE Up 3%

Narrow-moat Trustpower finished the 2019 fiscal year broadly in line with expectations. Underlying net profit after tax, or NPAT, was down 24% from the previous corresponding period, or pcp, to NZD 103 million; while EBITDA fell 9% to NZD 222 million. Both were 1% below our forecasts. Positively, the retail division continues to grow, with adjusted EBITDA up 3% mainly on higher electricity margins. However, generation volumes fell from stellar fiscal 2018 levels because of lower rainfall, causing generation EBITDA to fall 13%.

Management guided to fiscal 2020 EBITDA of NZD 205-225 million. The midpoint represents a 3% fall from fiscal 2019 and is based on hydro generation volumes being 2.5% lower than average because of current low lake storage levels. The earnings reduction also reflects lower “avoided cost of transmission” revenue, lower meter revenue, an unfavourable accounting change and higher costs. Considering all these negatives, a modest earnings decrease is not a bad outcome. We downgrade our 2020 forecast 2% to NZD 218 million. Thereafter, we expect EBITDA to grow at low- single-digit rates for the medium term. We increase our fair value estimate 3% to NZD 6.30 per share after rolling our financial model and consider the stock marginally overvalued. At the current share price, Trustpower offers a 5% fully imputed dividend yield.

Dividends were the main story in fiscal 2019, totaling a whopping NZD 74 cents per share. Dividends comprised fully imputed ordinary dividends of NZD 34 cps and unimputed special dividends of NZD 40 cps as the firm returned excess capital to shareholders after selling the Australian business. With gearing rising back to target levels, management is unlikely to declare any more special dividends. Ordinary dividends are expected to remain consistent with current levels.

We are encouraged by the retail division’s ongoing momentum. Fiscal 2019 EBITDA increased 8% to NZD 64 million. Excluding a NZD 3 million telco margin timing benefit, EBITDA grew 3%. Growth was delivered through an increase in electricity margins, telco customer numbers and telco margins. Total utility accounts increased by a modest 1% to 402,000, led by sustained growth in the number of telecommunications and gas connections (10% and 5% respectively) while electricity connections fell 2%. Positively, the number of customers with two or more products continued to trend higher, rising 7% to 107,000. This increases the stickiness of the customer base by increasing the perceived switching cost and thereby reduces costs to retain customers, at least in theory. Much will depend on the competitive environment.

Generation EBITDA fell 13% to NZD 172 million, mainly on lower rainfall hurting hydroelectric generation volumes. Generation volumes fell 11% from the stellar fiscal 2018, but remained 4% above the long run average of 1,917 gigawatt hours, or GWh. Management has guided towards lower generation volumes of around 1,870 GWh for fiscal 2020, reflecting currently low lake storage levels. Nonetheless, we expect rainfall to normalise in fiscal 2021, returning generation to the long-run average. From thereon, we expect generation volumes to increase modestly over the longer term, underpinned by a focus on upgrading efficiency of existing assets and adding to the generation fleet. An unexpected negative was a sharp increase in generation production costs, which management suggests will remain elevated as the firm improves employee capabilities.

Trustpower’s balance sheet remains in reasonable shape. Net debt/EBITDA increased to 2.5 times from 1.9 times in 2018, following payment of the special dividends. We think this is appropriate, despite sitting at the bottom of management’s more aggressive target of between 2.5 and 4.0 times. Management expects fiscal 2020 net debt/EBITDA to be in the range of 2.6 to 2.9 times after dividends are paid.