Daily ShareChat: Contact Energy

By Jenny Ruth

Tuesday 16th February 2010

Transmission constraints continue to make it difficult for Contact Energy to extract full value from its generation portfolio but its peaking power station and gas storage combination will give it the flexibility to increase earnings in all weather conditions, says Craigs Investment Partners analyst Grant Swanepoel.

He expects the negative costs associated with a constrained network should have dissipated in the six months ended December and, after two half years of declining earnings, he expects earnings per share will rise 13% to 15.7 cents.

He expects earnings before interest, tax, depreciation and amortisation (EBITDA) for the year ending June will be $493 million, above Bloomberg's consensus estimate of $478 million.

Swanepoel says that reflects his slightly better expectation of how Contact will be affected by the reshuffle of the three state-owned generator/retailers.

"Increased competition means Contact could find it more difficult to expand its customer base, particularly in the South Island. This should be more than offset by opportunities created by the reshuffling turmoil, the increased pressure on state-owned enterprises to improve asset returns and other changes set up to reward dry year capacity," he says.

He estimates Contact's 2011 portfolio can deliver retail electricity of $477 million. "Then, depending on wholesale prices, in a dry year the group's EBITDA could rise by more than $200 million."

BROKER CALL: Craigs Investment Partners rates Contact Energy as buy.

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