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Trustpower's bundle strategy successfully slowing margin decline, FNZC says

Wednesday 8th November 2017

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Trustpower's bundled power and telecommunication package has successfully slowed a squeeze on profit margins, something facing the entire sector, says First NZ Capital. 

The Tauranga-based electricity generator and retailer reported an 80 percent jump in first-half profit to $80.8 million earlier this week, benefitting from strong generation with the North Island hydro-dams flush with water. That was dependent on the weather and largely out of the company's hands, however FNZC analyst Nevill Gluyas was impressed by Trustpower's bundled retail netback rising to $111.50 per megawatt hour from $108.7/MWh a year earlier. The netback tracks retail revenue excluding all costs and overheads except spot energy prices, and is FNZC's preferred retail metric. 

FNZC predicts retail prices in the electricity sector will face declining margins over the next 10 years, and that Trustpower's plans to expand into other utilities was "an excellent strategy" to delay that decline. 

"TPW's mass-market retail load erosion prior to 2014 has been reversed and its bundled netback still sits well above its peers," Gluyas said in a note to clients. "We interpret these figures as continuing evidence for both our sector thematic and TPW's multi-utility strategy." 

Trustpower had 273,000 retail electricity customers as at Sept. 30, down from 278,000 a year earlier, while telecommunications customers increased to 80,000 from 69,000 and its gas connections lifted to 37,000 from 33,000. The number of customers with two or more products reached 94,000 in the latest period, a 4 percent increase from 90,000 at March 31, and 80 percent of new customers now purchase more than one product, he said.

New Zealand's electricity market is in for a price review under the new administration in a period when power companies are saying they don't plan to invest in new generation with demand relatively flat.

Government data show electricity prices rose 30 percent under the nine years of the previous government, compared to 63 percent between late 1999 and 2008. Over the same time frames, broader consumer prices rose 15 percent between 2008 and 2017 and 28 percent in the nine years before that. 

Trustpower this week said it was unlikely to invest in any significant new generation with uncertainty over the balance between supply and demand, although it said it was considering small builds or add-ons to existing plant. 

FNZC's Gluyas said the low prospect for new power stations over the medium term meant Trustpower's retail profitability would determine the firm's earnings and value. Other factors influencing the company's earnings and value outlook were a Tiwai Point smelter exit, the Electricity Authority's transmission pricing review, and its customer arrangements with shareholder Tauranga Energy Consumer Trust. 

Gluyas raised the stock's target price to $5.33 from $4.62, however, he lowered his rating on the stock to 'underperform' from 'neutral' due to the current trading price of $5.92. 

FNZC forecasts Trustpower's earnings before interest, tax, depreciation, amortisation and fair value adjustments of $261 million in the year ending June 30, 2018, within the company's own guidance for earnings of between $255 million and $270 million. Trustpower posted ebitdaf of $218 million in 2017. 


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