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Daily ShareChat: Contact Energy

By Jenny Ruth

Wednesday 2nd March 2011

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 Jenny Ruth

Contact Energy's first-half result pleasantly surprised with operating profit coming in slightly ahead of the previous first-half at $225.5 million, says Andrew Harvey-Green, an analyst at Forsyth Barr.

The operating profit "beat our forecast by an impressive 15%. The main drive of the difference was lower than expected gas costs and operating costs," Harvey-Green says.

However, strong hydro conditions were again a drag on the result, exposing Contact's long gas position - operating profit would have been between $35 million and $45 million better if it hadn't been long gas and ad its gas peaker station been operational, he says.

"Contact also announced that it has given the go ahead to the Te Mihi project. Contact's geothermal projects are amongst the cheapest, if not the cheapest, new generation projects in the country" and are a key part of his $7.78 per share valuation, Harvey-Green says.

In two years, the company will be adding 114 megawatts of capacity which its likely to add about $65 million to operating profit once completed, he says.

He expects Contact to raise equity to finance the $623 million project without stressing its balance sheet. He expects the equity raising will be between $250 million and $400 million.


Recommendation: Accumulate.

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