Energy sector share prices

September 26th, 2013 at 2:00 pm by David Farrar

A broker has sent through a research note on and Mighty River which I found interesting. The notes look at what the base price of the two companies should be, and the effect in their prices of Tiwai Point and the Labour/Green nationalisation policy.

They say:

  1. Base case scenario – MRP a target price of $2.60, 17% higher than current market price of $2.22, and Contact a target price of $6.00, 12% higher than current market price of $5.37
  2.  Should Tiwai Point be fully exited, our analyst sees this applying an 8.5% hit to his Contact valuation, but only 6.6% to MRP
  3. The Labour / Green proposal, if implemented, is far more damaging, resulting in a 23.3% drop in his Contact valuation but a far larger 31% hit to MRP (dropping the valuation to $1.78)

 

That’s an (un)impressive amount of sabotage. So not only would we end up destroying the market for power generation, and increasing the risk of black outs, we’d also wipe out a quarter to a third of the value of investors in those two companies.

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24 Responses to “Energy sector share prices”

  1. Cunningham (746 comments) says:

    But the Labgreens see that as a good thing. Anyone who has saved and invested should be fleeced in whatever way possible. To their credit it is a pretty innovate way to rob people so that they can distribute that money to their voting base.

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  2. martinh (824 comments) says:

    I dont know how the Greens or Labour could promote a green economy when they make greener technology (electricity power over fuel use) so unappealing to investment.

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  3. martinh (824 comments) says:

    Id like to see this research note and Id also like to know why Meridian isnt mentioned

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  4. wreck1080 (3,522 comments) says:

    Anyone who seriously thinks the current energy market is well structured then they need their heads examined.

    The greens/labour ideas are bonkers to say the least. But, they will attract the ‘money grows on trees’ voters.

    However, something is rotten in our energy production sector and it is certainly not working like the experts said it should. I know one person with an indepth knowledge of the electricity industry and he doesn’t like the way it is working.

    Probably I’m somewhat guilty of affirmative bias but I find most people are.

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  5. RightNow (6,336 comments) says:

    This will really help the left’s goal of encouraging investment away from property.

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  6. Alan (908 comments) says:

    Investment carries risk; changes in regulatory framework are one of them and are surely priced into the market’s thinking. it’s not a one way bet.

    Reduction in value of power companies is because they either have increased costs or lower revenue. What’s the prediction ?

    $2.60 for MRP seems very high based on their debt levels. Frankly I see no value in it above $2.10

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  7. taranaki (20 comments) says:

    How much value did Telecom lose as a result of Cunliffe carving it up? It was around 20% iirc. Seems about right.

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  8. martinh (824 comments) says:

    Alan
    Their dividend yield seems pretty strong still especially considering they have being through a very dry year. I think their dividend projection hasnt dropped since they listed so it must be even higher now as a yield since their share price drop since listing. Ive seen no reports by the company of an expected drop in dividend payments.
    So whats their debt level?

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  9. s.russell (1,486 comments) says:

    UK Labour has just announced a policy of price controls on electricity. Result One billion pounds wiped off value of power companies in the UK. See (eg) http://www.independent.co.uk/news/uk/politics/the-heat-is-on-defiant-ed-miliband-attacks-scare-stories-over-labour-energy-price-freeze-pledge-as-950m-wiped-off-centrica-shares-8838578.html

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  10. queenstfarmer (696 comments) says:

    Interesting to see Labour in the UK has just announced a similar policy:

    Ed Miliband was accused of ‘economic vandalism’ yesterday after his shock proposal to fix energy prices wiped almost £2billion from the value of Britain’s two largest power firms.

    The Labour leader faced a storm of criticism at his ‘insane’ plan to enforce price controls if he enters Downing Street.

    A defiant Mr Miliband said it was possible that a government he led would also seek to control other markets, fuelling speculation that Labour might step in to regulate water, rail and petrol.

    http://www.dailymail.co.uk/news/article-2432773/Milibands-bid-fix-fuel-price-blows-face–2bn-wiped-value-energy-giants.html

    How long before NZ Labour extends their plan to petrol and other sectors, too?

    [edit: s.russell - snap!]

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  11. Alan (908 comments) says:

    Martin,

    The high dividend payments are part of the problem, they are being funded from increased debt not higher profits.

    Since 2007 they have gone from a equity / debt ration of 75 / 25 to 51 / 49. Return on capital has dropped from 5.2% to 2.25%

    The government drained the company of capital before selling it. It was over priced and they did well to get it away at the price they did.

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  12. JeffW (303 comments) says:

    Government badly needs to change the superannuation scheme for government workers (sic) to defined contribution from defined benefit. In this way the bureaucracy will start to get hit from the crazy ideas they are asked to implement or advise on, rather than being protected from Wellington nonsense.
    As well as being a lot fairer for taxpayers in the long run.

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  13. Cunningham (746 comments) says:

    queenstfarmer (516) its scary, as much as Cunliffe trumpets his business knowledge, this is a policy dreamed up by someone who is economically illeterate and he has no credability by supporting it. The word is a rat race and we send signals like this to the world, people will just invest elsewhere. It’s not like there aren’t other countries they can put their money in.

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  14. martinh (824 comments) says:

    Thanks Alan
    Id be pissed if i was one of those mum and dad investors that had that happen to them.
    MRP will be stuffed when interest rates crank up.
    Whats your thoughts on Meridian?

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  15. markm (90 comments) says:

    When you talk of investor loss don’t forget the taxpayer is the biggest investor

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  16. lastmanstanding (1,154 comments) says:

    As a long time and long term investor I sat out MRP and am sitting out Meridian. I will wait until after the 2014 elections. If Lab/Green Govt then the share price of all power companies will tank and be a bargain long term. If the Nats get back then the prices will stay where they are and the div yields will be OK and certainly a hell of a lot better than long term TDs.
    Lab/Greens admit it would take 4 to 5 years to work out and implement the details of their power nationalization scheme and by that time we will have a Nat lead government.

    I bought Contact IPO and also hold other utilities on the basis that if the div yield is OK you are reducing the net costs of the goods/service provided to you and if the company does make wind fall profits you get a slice of that action to offset any prices increases.

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  17. lastmanstanding (1,154 comments) says:

    BTW the tax payer did a great deal with MRP. Got $2.50 for a share that has struggled to get north of $2.20 since listing so as a tax payer I say Key/English/Ryall did a great job for me.

    Don’t see the Lab/Greens admitting to that though.

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  18. Alan (908 comments) says:

    Meridian has a better balance sheet. With a structured payment plan I’d be interested at $3.15ish

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  19. muggins (2,898 comments) says:

    When the MRP shares listed I predicted they might fall to below $2.
    They havn’t ,so I was wrong.
    Now I am predicting they will go back up to at least $2.50 while National are in power but that they will fall again if a Labour/Greens coalition gets in.
    Meridian is hard to predict. Obviously a great return on the partly paid shares, but that is only short term.

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  20. Ian McK (237 comments) says:

    Norman and Shearer should be charged with financial treason. They have created uncertainty in the energy market, and until they come clean on what in hell their plans are, there will be an element of mistrust. These left-wing goons don’t care who they harm, so long as they can get at the trough to feed their deadbeat supporters. We bought minimal MRP shares, and don’t know about Meridian. It is far safer investing overseas than here, while there is uncertainty in the market.

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  21. Nick R (443 comments) says:

    Somehow I doubt Labour or the Greens will be losing any sleep over this. They already know, or think they know, how it will affect public finances, and are fine with that. And they won’t care about other shareholders at all. People who bought MRP or Meridian shares directly won’t be voting Labour or Green anyway. And people who own shares indirectly through Kiwisaver accounts probably won’t even notice a drop of 30% in the value of one or two shares in the portfolio.

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  22. Ian McK (237 comments) says:

    JeffW: Wonderful idea.

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  23. cha (3,524 comments) says:

    JeffW: Wonderful idea.

    Yes it was – in 1991, but go right ahead and make shit up.
    /

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  24. mikemikemikemike (239 comments) says:

    Increast the risk of power outages? You are so full of shit DPF. I’m currently in the states (you know, that wonderful free market place you worship) The building I’m in has lost power 3 times this morning, because the private entity that owns it is milking the profits from the overhead powerlines. The Airport computers were all down when I got into LA a week ago (when was the last time you saw this at Auckland Airport).

    As a shareholder in MRP I care only about getting as much return from my investment as quickly as possible, I really don’t care about anything over and above that – If I want a long term income (or income top-up) I have a business that I actually care about which gives me regular cash flow.

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