Meridian Energy Ltd

MEZ Details

Meridian Energy Ltd (ASX: MEZ) is engaged in the business of generating 100% renewable energy from renewable sources - wind, water, and sun. The NZ government holds a majority stake of 51% in the company.

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

• NPAT at $428 million: MEZ has delivered an EBITDAF of $729 million in FY21, down by $124 million or 15% over FY20. However, the company’s 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.
• Strong Retail Sales Growth: The company has been witnessing record results in the last two years driven by a strong generation and increasing retail sales volumes. MEZ has sustained that robust retail sales growth in FY21 with New Zealand volumes growing by 14% over the prior year.
• Dividend: 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 overall ordinary dividends for FY21 to 16.90 cents per share compared to the same level in FY20. The company has introduced a Dividend Reinvestment Plan with a 2.0% discount to be applied to the FY21 final ordinary dividend.

Financial Highlights (Source: Company Reports)

Operational Performance for The Month of July 2021

• National hydro storage rose from 92% to 103% of the historical average in the month to 11 August 2021. The company’s monthly total inflows stood at 156% of the historical average. Its Waitaki catchment water storage at the end of July 2021 stood at 111% of the historical average, while the water storage in Meridian’s Waiau catchment remained above average.

• The company’s retail sales volumes in New Zealand in July 2021 increased by 13.6% from July 2020 and residential sales grew by 10.3%, small-medium business sales rose 31.4%, agricultural sales increased by 9.4%, and corporate sales rose by 13.9%. However, large business volumes reduced by 10.0% in July 2021 compared to July 2020.

Recent Update

As per the press release dated 17 August 2021, the Electricity Authority (EA) has given its final verdict on actions to rectify the December 2019 Undesirable Trading Situation (UTS). This pertains  to the floods of December 2019 when hydro generators were handling record-breaking inflows and spill past hydropower stations was inevitable.

Key Risks

The company is exposed to risks related to adverse hydrological conditions such as dry periods or drought conditions in the Waitaki or the Waiau catchments which may result in lower water levels and would substantially hurt its generation capability. Further, it is susceptible to catastrophic events like a major earthquake, landslide, fire, flood, cyclone, explosion or act of terrorism that would adversely affect its power stations or the national high voltage transmission grid.

Outlook

The company continues to witness robust retail sales performance with momentum in its retail businesses remaining strong. The company highlighted that the underlying drivers of future business value stayed robust, specifically the growth in customer sales and its commitment to developing the Harapaki wind farm.

The  management expects its  group’s operating costs in FY22 to remain in the range of $275 million and $280 million that includes $6 million of SaaS cost reclassification. It also forecasts the group  Capex to stay between $205 million and $215 million for FY22. Importantly, it has guided that it will absorb the first full year of NZAS exit pricing in FY22. Besides, the operating result in July 2021 revealed improved hydro storage.

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

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and  a target price that reflects a rise of low-double-digit (in % terms) has been arrived. A slight premium has been applied to EV/Sales Multiple (NTM) (Peer Average), considering its strong momentum in its retail business along with its decent operating performance in July 2021.

Considering the aforementioned factors, decent outlook, and liquidity position, we give a “Buy” recommendation on the stock at the current market price of $4.850 per share (New Zealand Time: 12:35 PM (GMT +12)) on 27^th August 2021.

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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