Genesis Energy (ASX/NZX, GNE)

Fat Prophets

Friday 25th September 2015

Yield aplenty

What’s new?

Genesis Energy released its FY15 annual report in August, unveiling a solid financial and operating performance over the past year. The shares had been under pressure since reaching their all-time high in March following an earnings downgrade, however have recovered somewhat on the back of the recent result, which came in at the high-end of the revised guidance range.

A strong result in generation and an increase in wholesale prices were the key drivers. Fat Prophets are also encouraged by management plans to shift from gas/coal-based generation to renewable generation, and focus on improving operational efficiencies. We believe this should underpin profit margin gains over the medium term.

Also bolstering the appeal of Genesis Energy is the company’s strong free cash flows, which allowed for another robust dividend to be distributed to shareholders. The forecast dividend translates to a circa 8.2 percent cash dividend yield, which Fat Prophets see as very attractive, particularly in comparison to cash rates, and also given that the underlying investment case remains robust.

Genesis Energy reported total revenues for the 12 months ended 30 June 2015 of NZ$2,097.6 million, which represents an increase of 4.6 percent on FY14. The company leveraged positive revenue growth into a 12 percent gain at the EBITDAF line, with the reported $344.8 million comparing favourably to management’s revised guidance for $330 - $345 million (albeit below the $363 million prospectus forecast).

Driving the result, the FY15 electricity margin was up NZ$12 million against the previous period to NZ$525 million. This can be largely attributed to strong generation performance, with volumes up 4 percent and wholesale prices increasing by 5 percent. The other key driver of the FY15 margin gain was Genesis Energy’s continued cost-out initiatives, with the firm’s cost to serve having declined by 6 percent year on year (a NZ$13 million reduction). As the Company will maintain its focus on improving generation operational efficiencies, Fat Prophets believe the profit margin will report further improvements in future periods.

As has been the case in previous periods, Genesis Energy’s operating cash flow performance was strong, having reported NZ$318.5 million in FY15, up from NZD$303.9 million in FY14. As a result, Genesis Energy continues to exhibit an excellent ability to meet its debt servicing obligations, while also declaring a 23 percent increase in dividends.

Outlook

Plans to shift from gas/coal-based generation to renewable generation, and a focus on operational efficiencies should see profit margins lift in the future in our view. Fat Prophets also expect the company’s Kupe asset will be a key earnings growth driver as oil prices tick back up over the medium term. While the company’s return on equity has also remained strong at 4.8 percent in FY15, we expect it to increase to 5.2 percent in FY16.

Price

Looking at the charts, a double bottom support looks to be in place, with the share price retracing to the upside, raising the pressure on resistance at $1.79. A successful break out should set the platform for further gains over the medium term. Fat Prophets’ technical view is broadly consistent with Genesis Energy’s fundamentals, with the company’s shares currently trading at around 20 times FY16 earnings and offering an 8.5 percent yield.

Worth buying?

A strong financial and operating performance in FY15 reminds Fat Prophets of Genesis Energy’s earnings stability in variable market conditions and the company’s ability to cope with significant ongoing changes (and challenges) in the New Zealand energy sector. Fat Prophets expect the yield alone should see investors continue to gravitate towards the shares. We also expect a re-rating as higher oil prices and a cost out programme flow through to the bottom line. Greg Smith is the Head of Research at Fat Prophets share market research. To receive a recent Fat Prophets Report,

Greg Smith is the Head of Research at Fat Prophets share market research. To receive a recent Fat Prophets Report, CLICK HERE.

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