Monday 31st March 2014
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Four out of five independent research reports from investment houses in New Zealand and Australia value Genesis Energy shares at higher than the $1.55 a share offer price announced by government Ministers last Friday.
The highest valuations, from Edison Investment Research and Craigs Investment Partners, suggest Genesis shares could be worth $1.97 apiece, while the most conservative valuation is from Australian research house Morningstar, which places a 'fair value' on the shares of $1.60.
However, Craigs' top end valuation assumes a National Party win at the Sept. 20 election. If Labour is elected, it puts a $1.52 valuation on Genesis, based on the Labour and Green parties' plans to reregulate the electricity market.
The stock exchange operator, NZX, commissioned and published the research from Craigs, Morningstar, Wellington boutique investment house Woodward Partners, advisory firm Edison, and the Australian stock-watch service Fat Prophets.
Fat Prophets does not venture its own valuation, but judges the offer "quite attractive" and worth participation. It recommended against participation in the last year's two partial privatisations of MightyRiverPower and Meridian Energy.
Genesis Energy shares have been able to be marketed to retail investors since Saturday, after the government allotted 40 percent of the up to 49 percent of the company's shares on offer to New Zealand and foreign institutional investors.
All the research reports regard the main risks to Genesis as being its exposure to onerous take-or-pay contracts for natural gas from the Kupe oil and gas field, in which it owns a 31 percent stake, and the fact that Kupe's earnings will cease in the late 2020s, when its reserves are exhausted.
The other major risk identified, but discounted as unlikely by some of the research, is the Labour and Green parties' proposals to drop power prices by dismantling current wholesale electricity market arrangements and imposing a central buyer model.
Morningstar, which describes current market arrangements as "oligopolistic", says the likelihood of a National-led government being returned in this year's election, based on current polling, "gives some hope of the status quo being maintained."
The complexity of reforms required if a Labour-Green government is formed also means they would take time to implement, so Morningstar thinks "the likelihood of regulation is not imminent."
Craigs puts a value range on Genesis shares of between $1.52 - the only valuation among those published today that is below the $1.55 IPO price - in the event of a Labour-Greens win, but says that could rise as high as $1.97 if a National-led government is reinstalled.
A further risk, which all see as manageable to differing extents, is the potential wind-down or closure of the Tiwai Point aluminium smelter from 2017 onwards.
Craigs estimates Genesis would be trading at around $1.63 a share, if listed on the sharemarket today, based on the performance of its peers, with potential for up to 10 cents a share upside in the event of a dry year depleting hydro lakes and requiring more use of Genesis's gas and coal-fired power generation capacity.
Woodward Partners are the most enthusiastic, saying Genesis represents "fundamentally excellent value" at $1.55 a share and offers "the strongest dividend yield of any NZX50 company."
"The extent to which distributions can be maintained into the 2020s will be a function of Genesis's forward capital investment funding profiles. Until then, we see clear scope for around five years of initial drag racing."
All the reports confirm the view that Genesis, along with the rest of the electricity sector, will face little pressure to spend capital on new generation capacity in the near future as electricity demand growth has slowed to below historical averages and an excess of new generating capacity has been built.
Craigs warns that the high 14.3 percent gross dividend yield projected for Genesis in the 2015 financial year at the $1.55 offer price is an "over-simplified" way to look at the company's potential, since it includes earnings from Kupe, which will cease when the field runs down after about 2026.
"Genesis needs to return a materially higher level of cash relative to its valuation in order to compensate investors for the risk and timing associated with unlocking the value of Kupe before it runs dry."
That is complicated by the fact that Genesis is selling gas from the field at a loss under the take-or-pay contracts it signed in the mid-2000s, when the industry was focusing on the then expected early rundown of the Maui gas field. The discovery of new Maui reserves and a surge in renewable generation investment, particularly baseload geothermal power plants, have changed that dynamic, leaving Genesis with more gas than it can use for the next few years.
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