Contact Energy shares light up on power price prospects

By NZPA

Tuesday 11th February 2003

Shares in the sharemarket's third largest stock, Contact Energy, soared to new records today and brokers expect the share price to continue northward.

Contact closed up 21 cents, 5 percent, at $4.47, having touched $4.50 at one stage. That added over $100 million to Contact's $2.56 billion market capitalisation.

Analysts, who place a value close to $5/share on the stock, say there is one simple reason for the share price rise -- the medium-term outlook is for power prices to rise and Contact owns energy assets.

"The nation is going into a period of very short energy supply and Contact is one of the suppliers of energy," ABN Amro head of research James Miller said. "Surely, in that environment you would expect prices to rise and Contact's valuation is very sensitive to a valuation in the forward electricity price curve."

Mr Miller discounts the view that Contact is rising on the prospect of a dry winter and a consequent shortage of hydro power and higher wholesale prices. Rain tomorrow will change that, he said.

"If you are buying it on that basis it's a gamble."

He believes the market is buying Contact on longer-term fundamental factors, particularly the fact that New Zealand is moving into a period of less abundant energy supply when the giant Maui field is depleted.

"The market is concentrating on long-term fundamentals," he said. "It's got about a three to five year time-frame as the dynamics of the energy market start to get factored into the share price."

The rejection by institutions of Edison Mission's $4.14/share bid for a full takeover a year ago seems to have been vindicated. Since early November, Contact shares have risen 16 percent while the top 40 share index has fallen 4 percent.

A sharp fall in bond yields in recent weeks has added to Contact's attraction. Contact last year paid dividends of 19.9 cents per share -- a 4.5 percent tax-paid return and the equivalent of 7 percent yield for bonds. Five-year Government bond yields are currently at 5.5 percent on the secondary market.

Mr Miller said the recent Maui redetermination confirming the gas will run out sooner than expected had simply brought forward the assumptions on Contact's valuation.

Late last month, Contact's share price got a boost when Shell and Todd Energy reduced their estimates of the size of the Pohokura field, New Zealand's main hope to replace Maui gas. News yesterday that New Zealand Oil and Gas' promising Tui-1 well has proved a dud adds to the view that existing gas is more valuable.

Contact yesterday announced a first quarter net profit of $18.4 million, a slight improvement on the same period last year.

The company said the result was driven by continued strong growth in retail electricity sales, offsetting lower wholesale electricity revenues.

Chris Stone, executive director of McDouall Stuart Securities, said an upward revision of Contact's asset backing by $843 million was a "huge increase" that would affect a significant impact on future depreciation charges.

Contact held its annual meeting in Christchurch today and unsurprisingly they were in a good mood. Chairman Phil Pryke said the company would restore its ageing New Plymouth power station to a dual fuel -- gas and oil -- operation.

It said it would issue $550 million of long-term debt to pay for the recently acquired Taranaki Combined Cycle power station.

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