Woodward Partners research puts Meridian share value at $1.81

Wednesday 2nd October 2013

The first of two independent research reports commissioned by the New Zealand stock exchange operator, NZX, on the Meridian Energy partial privatisation values the company's shares at $1.81 apiece, some 21 cents above the capped price promised to small investors.

The company rates the potential closure of the Tiwai Point aluminium smelter, Meridian's largest customer with which new, discounted electricity contracts have just been signed, as one of Meridian's lowest risks.

The only high risk identified is the potential for low rainfall to stop Meridian generating sufficient hydro-electricity to meet demand, while two medium level risks are identified as the potential for weak electricity demand to drop wholesale prices further, and for the Labour-Greens single buyer policy to be implemented.

But while the impact of the Labour-Greens policy is rated high, at 5 on a scale of 1 to 5, likelihood of implementation is only given a rating of 3.

The policy "would have a profound impact on Meridian's ability to continue paying its dividend so we rate the impact as 5," said Woodward, a boutique funds manager and investment house. "However, we also consider the likelihood of occurrence in the next three years to be moderate (3).

"Firstly, Labour/Green would need to win the next election in November 2014. Secondly, such a

change to the electricity sector would require a fundamental legislative change, which

would take time so would probably be scheduled for a presumed second term."

Concerted opposition to the policy may also see it watered down. That view differs from that published late last week by First NZ Capital, which sees only a 10 percent chance of implementation, but believes the major planks of the policy could be implemented within the first two years of a new parliamentary term.

Other, lesser moderate risks include increased retail competition and the introduction of a price for water, which would hit Meridian especially hard since it is the country's largest hydro-electric generator.

"We believe Meridian is fundamentally a conservative investment with the ability to pay a predictable dividend," Woodward concludes. "That said, Meridian does face several risks that could impact

dividends."

However, another research report published on the NZX website today, from TDB Advisory says "it would be mistake to regard these companies as utilities with stable earnings".

TDB values Meridian shares on a base case scenario at $1.90 and gives them a trading range of $1.70 to $2.10.

"These companies, and Meridian in particular, face and must manage a high degree of uncertainty about water inflows, other fuel prices, the regulatory regime and competitors' behaviour," says TDB. "This uncertainty translates into revenue and earnings volatility. Much of Meridian's volatility stems from its high reliance on hydro power."

A second NZX-commissioned report is due to be published tomorrow morning, from Edison International Research. NZX commissioned the reports, which it has not influenced, after complaints that retail investors had too little independent information to help assess the MightyRiverPower float because so many major participants in New Zealand capital markets were in some way involved in it.

"They've learnt a bit from MRP," said Mark Lister of sharebrokers Craigs Investment Partners in Tauranga. "The price cap (at $1.60 for retail investors) gives certainty and clarity. The pricing range is sharper and cheaper from the perspective of dividend yields."

Provision of research reports, five of which are already published on the NZX website, meant "there's not that black hole of information we had with MRP."

Separately, MRP today held investor presentations. Its share price rose 1.8 percent to $2.28 today, having listed in May at $2.50.

The government is selling a minority 49 percent stake in Meridian by share float, with retail investors needing to register interest by Oct. 18, and listing on the NZX and ASX scheduled for Oct. 29.

BusinessDesk.co.nz

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