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Re: [sharechat] Focus on CEN(Part1)

From: "Fiona Phibbs" <>
Date: Thu, 29 Apr 2004 17:09:11 +1200

Hi Snoopy

Contact are certainly an interesting participant in a sector that is a
challenge to value as you so rightly point out.  Had a good look at them
last year(and earlier) and discovered a few interesting things.  As you
noted the company revalues its generating assets (every 5 years if my memory
serves me correct) which makes any ratio analysis challenging and somewhat
meaningless, and sends ROI and ROA figures south.  However there are some
obvious advantages for the company to do so. Firstly it gives Contact more
capacity on its balance sheet, just in case it wants to build another power
station or decides on an alternative investment.  Secondly, it also
justifies the company increasing prices to its customers by demonstrating
that it should earn a decent return on investment to those who oppose any
increases.  Both in tandem allow Contact to increase its profit even if the
return on investment does not follow - as a matter of interest how are the
executives remunerated? It would not surprise me if it were based on profit
increases. Nevertheless from an income-share point of view you could do a
lot worse - I wish I had bought some at $2.50, now that would be a good
return on your money - better than the bank with not much more risk IMO.

cheers Dean

----- Original Message -----
From: <>
To: <>
Sent: Wednesday, 28 April 2004 12:48
Subject: [sharechat] Focus on CEN(Part1)

> Contact Energy is the fifth 'arm' of my income portfolio.  It doesn't get
> discussed much on this forum which is surprising given that at one
> point more New Zealanders held shares in Contact Energy than any
> other company.     So how to value it?    The short answer is 'with
> difficulty'.   CEN is a simple (sic) energy business but in this case that
> means:
> 1/ An electricity generator and wholesaler
> 2/ An electricity retailer.
> 3/ A natural gas retailer.
> One of the best ways to learn how to value a business is to get hold of
> a Grant Samuel and Associates appraisal report on it.    These reports
> are rare as they are only issued in times of a takeover or perhaps a
> move by the existing controlling shareholder.   In mid 2001 Edison
> Mission Energy, 40% shareholder of Contact, gave notice that they
> wanted to increase their stake.   The conclusion of the Grant Samuel
> Appraisal report on the Edison bid at between $2.90 and $3.25 per
> share was as follows:
> "The terms of the proposed Restricted Transfer are fair in so far as the
> price received by those shareholders who sell to EME is likely to equal
> or exceed the fair market value of a portfolio interest in Contact
> Energy."     Translation:   'Shareholders who sell on market to EME will
> get market price'.   Hmmm, well I don't need a highly paid consultant to
> tell me that!
> However, a rider in the recommendation of the independent director's
> covering letter is telling:
> "Opinions as to value can differ significantly with reference to the key
> influences on Contact's value.  In particular these include views
> regarding the likely future price of wholesale electricity and what is an
> appropriate rate of return on the capital invested in the company's
> business relative to the market as a whole."
> Clearly with hindsight those who sold out around the $3 mark have
> missed out on approximately an 80% gain in the last three years and
> would be feeling fairly foolish.  It is clear to me that a good
> understanding of the wholesale electricity market and given recent
> asset revaluations, appropriate rates of return, are critical in valuing
> Contact Energy.   That is what I plan to spend some time looking at.
> Please feel free to join in.
> --
> Message sent by Snoopy
> on Pegasus Mail version 4.02
> ----------------------------------
> "Sometimes to see the wood from the trees,
> you have to cut down all the trees."
> --------------------------------------------------------------------------
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