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Daily ShareChat: Contact Energy

By Jenny Ruth

Thursday 5th May 2011

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 Jenny Ruth

Contact Energy's announcement of a $350 million one-for-nine rights issue priced at $5.05 per share to partly fund its $623 million Te Mihi geothermal project was in line with expectations, says Andrew Harvey-Green, an analyst at Forsyth Barr.

Contact's major shareholder, Australia-based Origin Energy, has said it will take up its full entitlement and the rest of the issue is fully underwritten.

"Given the purpose of the rights issue is to fund a value-enhancing capital project and, even then, the equity raising is more about providing Contact with headroom, we believe that the issue will be well supported," Harvey-Green says.

"That said, the rights trading period may provide an opportunity for investors and, given the quality of Contact, and already significant discount to value, it would be worth taking any such opportunity," he says.

Harvey-Green values the shares at $7.71, well above the current share price. "Over time, we expect the value gap to close as Contact's earnings outlook improves with the geothermal projects coming to fruition and better electricity market conditions." However, near-term trading may remain subdued with retail market conditions remaining tough and the potential for partial listings of the state-owned generator/retailers overhanging the sector, he says.


Recommendation: Accumulate.

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