Thursday 20th March 2014
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The New Zealand government recently released the offer details of the third and final cab off the rank in a series of sales of state owned energy companies. The latest is Genesis Energy which is the country’s largest electricity and gas supplier.
The company also owns and operates a portfolio of thermal and renewable generation assets, a coal and gas station in Huntly (New Zealand’s largest by capacity) and a number of hydro stations. In addition, Genesis Energy owns 31% of the Kupe joint venture, which holds the namesake oil and gas field in the offshore Taranaki basin. The overall contribution of Kupe to Genesis’ bottom line is significant, making up just under a third of the company’s underlying earnings.
We previously covered both the floats of Mighty River Power and Meridian Energy and advised Members to sit them out. To date, this has proven reasonably well-founded with the former trading more than 20 percent below its offer price, and the latter struggling to push above the NZ$1 list price until fairly recently.
However, we believe that there are a number of important differences with the Genesis Energy float which could potentially make it a more attractive offering. We believe the structure of the offer is more appealing with investors having clarity on price before applying. The assets behind Genesis are also different in makeup, with more exposure to thermal energy in particular. Furthermore, the company is more diverse in terms of customer base and revenue streams.
In terms of the financials, Genesis Energy is expecting EBIDAF (earnings before interest, tax, depreciation, amortisation and changes in asset fair values) in fiscal 2014 to decline 9 percent to NZ$305.2 million due to lower average wholesale electricity prices, a further planned outage at Tekapo, and costs associated with the partial float. The story is somewhat brighter for fiscal 2015 with earnings set to rise back to NZ$363.4 million. As a consequence, bottom line net profit is set to come in at NZ$41.8 million for the year to 30 June 2014, but forecast to more than double to NZ$95.4 million in the year to June 2015.
The indicative price range set for the Genesis Energy IPO is NZ$1.35 to NZ$1.65 per share. Unlike previous energy floats, the government is doing the book build at the start of the process (rather than at the end) and setting a final exact price on March 28th. Investors will be able to apply for shares from March 29th with the offer closing on April 11th. The company will list on both the NZX and the ASX on April 17th.
Based on current pricing, Genesis Energy looks fairly fully valued on FY2014 forecasts, trading on 32 to 39 times bottom line earnings. However, this improves to 14 to 17 times for the 2015 year. From an income perspective, the shares boast considerable appeal with a cash dividend yield of 7.8 to 9.5% for 2014, rising to 9.7 to 11.9% for 2015.
As the IPO price has not yet been set, we are reluctant to make a formal recommendation on Genesis Energy. However, prima facie and despite various regulatory and operational risks (especially weather), we believe the partial float looks potentially attractive. The underlying assets are more diverse than those of Mighty River Power and Meridian Energy, and we believe the offer has been structured in a more attractive manner.
A final price towards the bottom end of the NZ$1.35 to NZ$1.65 per share indicative range could well tip the balance to a favourable recommendation.
Greg Smith is the Head of Research at Fat Prophets.
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