Forum Archive Index - April 2004

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Dean,
 
> 
>Contact are certainly an interesting participant in a sector that is a
>challenge to value as you so rightly point out.  Had a good look at
>them last year(and earlier) and discovered a few interesting things. 
>you noted the company revalues its generating assets (every 
>5 years
>if my memory serves me correct) 
>

Asset revaluation every three years.

>
>which makes any ratio analysis
> challenging and somewhat meaningless, and sends ROI and 
>ROA figures south.  
>

Yes, quite true.  However, even if there had been not asset 
revaluations I think CEN would still be struggling to make an ROE of 
15% plus.  

>
>However there are some obvious advantages for the company to
>do so. Firstly it gives Contact more capacity on its balance sheet,
>just in case it wants to build another power station or decides on an
>alternative investment.  
>

Yes, very good point.

>
>Secondly, it also justifies the company
>increasing prices to its customers by demonstrating that it should
>earn a decent return on investment to those who oppose any 
increases.
>

Yes it's a kind of positive feedback loop.  Raise power prices so you 
need to revalue the assets upwards so that the rate of return doesn't 
look outrageously high.   Then you can raise power prices again 
because you are making such a poor return on your revalued assets!

The shareholder  in me loves it.
The customer in me hates it.   

But at least holding CEN shares gives me a kind of hedge on my 
power bill going  up!

> 
>as a matter of interest how are the
>executives remunerated? It would not surprise me if it
> were based on profit increases. 
>

That sort of detail isn't usually revealed, although it is common for 
senior executives to have an 'at risk' portion of their pay on top of a 
lower 'base salary'.    CEO Barrett earned between  $310k-$320k in FY 
2001, between $370k and $380k in FY2002 and between $380k and 
$390k in FY2003.

Over the same period 'core earnings' went from $66m to to $107m to 
$118m.  So yes I do see some correlation there.

>
>Nevertheless from an income-share point of view you
>could do a lot worse - I wish I had bought some at $2.50, now that
>would be a good return on your money - better than the bank with not
>much more risk IMO.
> 

I agree.   The day Contact is a poor investment will be the day that 
power prices start going down.  I'll be out watching the pigs on the 
runway at the aerodrome when that happens.

SNOOPY

discl: hold CEN

--
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