Daily ShareChat: Contact Energy

By Jenny Ruth

Despite Contact Energy's first-half results being lower than expected, "we now feel the value proposition is too strong to ignore," says Macquarie Equities analyst Stephen Hudson.

Contact reported an $80 million net profit and $225 million in earnings before interest, tax, depreciation and amortisation (EBITDA) compared with Hudson's $97 million and $247 forecasts.

About $40 million of additional costs, essentially related to transmission constraints, in the first half of 2009 were matched by higher-than-expected costs in the first half of 2010, including a 9% increase in generation costs, a 5% increase in electricity network costs and a 76% rise in customer retention costs and debt write-offs.

"In addition, wholesale electricity revenue was lower than forecast on a lower hedge ratio (87% versus 93%) in a materially weaker wholesale market," Hudson says.

He says the outlook for Contact's pricing is one of its single largest value drivers and he is forecasting "relatively conservative" 3% increases a year for the next three years before reverting to 1% growth a year.

But the company appears confident its 5% price increase in March and 4% increase in July (an effective 2% increase in retail tariffs) due to the Emissions Trading Scheme will hold.

Every 1% increase in forecast prices moves his valuation by about 25 cents a share, Hudson says.

BROKER CALL:  Macquarie Equities rate Contact Energy as outperform (raised from neutral).

Daily ShareChat articles report how the main experts in the market might view a certain share and we provide this commentary as a useful resource for investors. Content on this site does not in any way constitute a recommendation to buy, hold or sell any particular share. Investors should always seek professional advice before making any investment decisions.

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