Week: Contact to make more money, "It's as simple as that"

By Andrew Macdonald of NZPA

Friday 18th February 2005

Contact Energy shareholders can rest easy, at least that's what brokers say.

Contact this week confirmed a whacking spike in its December quarter profit to $41.3 million, up 50% on the previous same period.

It also quashed rumours of a capital return, but flagged investment in growth, infrastructure and security of energy supply.

Moreover, Contact would focus its energies on its New Zealand operations, said chief executive Steve Barrett.

"We see no value for shareholders in sinking cost into an Australian retail operation that would be competing directly with our majority shareholder," Barrett says.

All of this, says Macquarie Equities investment director Arthur Lim, amounts to good news for the Contact faithful.

Stability has returned to Contact and the hydro, geothermal and thermal generator's outlook is encouraging, says Lim.

"That management aren't looking at a capital return at this stage suggests we do have a truly independent operation here," he said.

"That's one that's being managed for the greater benefit of shareholders, which I think is a positive."

The firm's 100,000 mum and dad investors can now take a breather after the 2004 watershed, that saw Australian firm Origin Energy snap up Edison Mission Energy's (EME) 51.2% stake, Lim says.

At its annual meeting in Wellington this week, Contact bosses ran through the December quarter performance, comparing it to that of a year earlier.

The bald figures included revenue of $324.7m (up 9%), operating surplus before tax of $66.9m (up 47%), and earnings per share of 7.16c (up 50%).

Contact's balance sheet for the September 2004 year showed it had total assets of $4.38 billion, while total liabilities weighed in at $1.39b.

On this basis, chairman Grant King says Contact is "well-placed" to pursue investment opportunities and, as it happens, has already started.

On the agenda is $130m to be spent on increasing generation at its Wairakei, Poihipi, Ohaaki, Hawea Gates, Otahuhu-B and Taranaki Combined Cycle operations.

"However, Contact's most significant future generation options are the new, large scale combined cycle gas turbine (CCGT) plants that could be built on sites at Otahuhu and Stratford, and for which the company already holds resource consents," King says.

"Each of these plants is equivalent to between two and three years' electricity demand growth," he says.

However, there is a big proviso - that Contact can find gas supplies to fuel the plants and at present that is a big question mark.

Such investment opportunities are "important at a time when New Zealand is facing substantial challenges in meeting its fuel and generation needs over the next decade".

The total bill is some $1b over the next five "or so" years to capital expenditure and new gas contracts.

"These contracts relate to the Pohokura gasfield and settlement of our entitlements to remaining Maui gas, leaving us certain about our capacity to run our modern thermal plant until the end of the decade," says King.

He also emphasised the Contact-Genesis Energy study of imported liquefied natural gas (LNG) to provide a back stop as the Maui field runs down.

Lim says the faithful will "be taking a lot of comfort from these moves because Contact has shown its ability to leverage its earnings and good dividends".

The firm's fully imputed dividend for the September 2004 year was up 9% at 25c a share. But it is Contact's steadily rising share price that has the investors rubbing their hands together.

In the two years to December 2004, Contact shares gained 61% to $6.40. They have since pushed higher still - even touching $7.00 each earlier this year - though mostly on investors' now dashed hopes of a capital return.

Late today, Contact shares were up 3c at $6.96, having ranged between $4.99 and $7.14 in the past year.

"That's a fantastic share price appreciation and I think the noise coming from management about what they intend to do, and how, is all focused on sustaining returns and meeting future power requirements," Lim says.

The share rise makes a mockery of the recommendation of the independent directors, led by then chairman and current director Phil Pryke two years ago, for shareholders to accept EME's $4.14 a share takeover bid.

Even then, it was below value of the stock, estimated by independent advisers Grant Samuel.

Lim said institutional investors had been buying Contact, which superficially looks expensive, because they expect Contact to increase electricity prices even more.

The change in principal shareholder is surely also a factor.

Lim says the Australian influence should not be too much of a concern for either mum and dad, or institutional shareholders as Origin, which has three directors on the Contact board, has a track record of adding value to its investments.

"At this stage, what they (the board) say would tend to suggest that shareholders can actually take comfort that it's not going to be a rape and pillage type operation," he says.

"If one looks at the big picture, the era of cheap electricity is over for New Zealand and here we have a company, from generation and retail points of view, that can give investors an excellent hedge against ever-rising energy prices."

Hamilton Hindin Greene broker James Smalley said it seemed to be a foregone conclusion that gas and electricity prices would rise.

"I would say the majority of retail investors would be happy with the way their investments are going," Smalley said.

"In my opinion, it's a good stock to hold long-term. The industry dynamics mean Contact's going to make more money," he says.

"It's as simple as that."

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