Friday 29th April 2016
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Genesis Energy released its H1 2016 interim report in February, revealing a solid financial and operating performance against a back drop of intense retail competition and variable wholesale market conditions. For the six months ending 31 December 2015, Genesis Energy reported a 2.5 percent decline in total revenues to NZ$1,041.6 million compared to 1H15, with this due primarily to lower gas and petroleum revenues. EBITDAF for 1H16 was $175.5 million up 1.5 percent above the EBITDAF from the previous comparable period.
In our view, the key positive from the result was the fact that the company managed to turnaround two years of steadily declining account numbers. Total electricity customers stood at 522,586 at 31 December 2015, up 1 percent on December 2014 but a positive number nonetheless. This was primarily driven by growth in Energy online customers from 74,400 at 31 December 2014 to 80,400 a year later. The overall 12 month switching rate for Genesis is now 0.7 percent lower than the broader electricity market at 19.8 percent.
The higher customer number, in combination with growth in generation revenues helped Genesis stave off the impact of intense retail competition and variable wholesale market conditions. Technology is making price comparisons between energy retailers far easier, and with more entrants entering the market, competition in the retail sector is heating up and putting pressure on margins. According to the Electricity Authority there are now 22 retail parent companies with 33 brands, compared with only 12 retail parent companies five years ago.
With little scope for product differentiation, incentives to switch provider invariably revolve around price in the form of an upfront discount on electricity. Genesis has been taking it to the competition in this regard, offering the first month’s electricity free (up to $250) for signing up to a 12 month fixed plan compared to Meridian’s offer of $100 free power.
Genesis Energy also reported a strong increase in free cash flow and upped its dividend by 2.5 percent, with gearing (debt to debt plus equity) remaining stable at 34.6 percent in 1H16, compared to 34.4 pe\r cent in 1H15. The forecast dividend translates into a circa 8.2 percent cash dividend yield, which we see as very attractive given our view on future earnings growth and cash conversion.
While Genesis Energy’s current earnings ratio for FY16 is significantly higher than the market at 21.8 times, we believe the company’s prospective dividend yield of 8.0 percent provides a better benchmark of the stock’s value relative to the market.
Encouragingly for investors, the technical set up for Genesis Energy is consistent with the company’s currently favourable investment fundamentals. In particular, we note that Genesis Energy’s share price is currently testing support at the 50-day moving average of $1.84. Should the share price hold, then a retest of the March high of $2.04 is likely. Coupled with the bullish moving average crossover that has been in place since January, this suggests momentum will favour the upside.
We believe that interim results from Genesis Energy were solid, particularly given the back drop of intense retail competition and variable wholesale market conditions. We are encouraged that company initiatives are seeing growth in customer numbers and generation revenues. Given our bullish view on energy prices, we also see an earnings recovery angle coming through with the company’s 31 percent stake in the Kupe Oil & Gas field. The current dividend yield of 8 percent is also very attractive given we believe the underlying investment case remains robust. Greg Smith is Head of Research at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE
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