Meridian Energy Limited

MEZ Details

Meridian Energy Ltd (ASX: MEZ) is engaged in the business of generating 100% renewable energy from renewable sources - wind, water, and sun. It supplies electricity to customers through an electricity grid that combines electricity supplied from renewable and non-renewable sources.

Results Performance for the Year Ended 30 June 2021 (FY21)

• The EBITDAF stood at $729 million in FY21, down 15% YoY. However, net profit after tax rose to $428 million in FY21 owing to the advantage of $248 million of positive non-cash movements in the value of hedge instruments.
• The company witnessed record results in the last two years driven by a strong generation and increased retail sales volumes. It maintained robust retail sales growth in FY21 with 14% YoY volume growth in New Zealand.
• The board has approved a final ordinary dividend of 11.20 cents per share that stayed in line with the previous year. This takes the ordinary dividends for FY21 to 16.90 cents per share compared to the same level in FY20.

Financial Highlights (Source: Company Reports)

Operational Performance for September 2021:

• National hydro storage from the start of September until 12 October 2021 increased from 126% to 134% of the historical average. North Island storage increased to 115%, and South Island storage increased to 140% on average by 12 October 2021. Total monthly inflows were 171% of the historical average.
• The national electricity demand in September 2021 was 1.7% lower than the same month last year. This was due to more stringent lockdowns in the month as compared to the previous corresponding period.
• The residential growth was reported at +18.0%, followed by small-medium business at +14.5%, corporate (+9.0%). Large business volumes were reported at -9.7% and agricultural at -4.3%.

Recent Update:

• On 28 October 2021, the company highlighted that they are discussing with New Zealand Aluminium Smelters Limited (NZAS) a possible suspension of the Potline 4 contract through to 31 January 2022.
• On 27 October 2021, the company informed the market that it had responded to Electricity Authority’s Wholesale market review. The Authority seems to believe that the smelter's price was ‘possibly’ below what Meridian could have gotten by selling this electricity elsewhere.

Outlook:

The company continues to witness sound retail sales performance with robust momentum in its retail business. As a result, the company expects operating costs to remain in the range of $275-$280 million in FY22, including $6 million of SaaS cost reclassification. Further, the capex is expected to stay between $205-$215 million for FY22. Importantly, it has guided that it will absorb the first full year of NZAS exit pricing in FY22.

Key Risks:

The company is exposed to risks related to adverse hydrological conditions, resulting in lower water levels and substantially hurting its generation capability. Further, it is susceptible to catastrophic events adversely affecting its power stations or the national high voltage transmission grid.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Technical Overview

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation:

The company has delivered a 6-month and 9-month return of ~-6.11% and ~-28.96%, respectively. The stock is trading lower than the average of the 52-week high price of $9.33 and the 52-week low price of $4.58.

The stock has been valued using an EV/EBITDA multiple-based illustrative relative valuation and have arrived at a target price that reflects a rise of low-double-digit (in % terms). A slight discount has been applied to EV/EBITDA Multiple (NTM) (Peer Average), considering a lower net margin at 10.0% in FY21 versus the industry median of 12.0% and the decrease by 1% in average sales price for NZ corporate segment in FY21.

Considering the aforementioned factors, we give a “Buy” recommendation on the stock at the current market price of $4.72 per share as of 29^th October 2021 (Time: 3:03 PM (GMT+10), Sydney, Australia). 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices

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