25 March 2014
Could Genesis Be The Best Of the Power Company Partial Sales?
The editors of respected sector weekly NZ Energy & Environment Business Alert say a general consensus seems to be forming over the Genesis float - It could be a handy investment in the short to medium term. Analysts have noted the high dividend yield with Forsyth Barr describing it as “turbo charged.” Like a protective parent Genesis Energy CEO Albert Brantley has also hit back at descriptions of his company as the "ugly duckling" of the power generators, saying critics did not grasp its diversification. In Brantley’s opinion this makes Genesis a safer bet than many would think. He may be right, but like all power utilities it seems to be facing an uncertain long term future.
NZ Energy & Environment Business Alert's editors note Generation wise, Genesis has the largest power station, in Huntly, which is always going to make a lot of money when the hydro lakes run low and is a steady earner most of the time. Some people also forget Genesis does have hydro assets in both islands to balance out its profile. However like all generators it is dealing with limp demand, the uncertainty about the future of the Tiwai smelter and what its closure will mean, and the unknown effect of a potential Labour/Green govt.
The editors say Genesis can point to the largest customer base - electricity (27% market share) and gas (44% market share) - and its considerable investment in electricity smart meters. But customer bases which can be won can also be lost and so far Genesis seems to be making little use of its investment in meter technology. Genesis’s 31% stake in Kupe is another point of difference, which, as Forsyth Barr says, allows the company to offer a dividend yield of between 13.5% and 16.5%. Whether this will be maintained beyond the forecast period though is another matter, however there is potentially more wealth to be squeezed out of the lucrative field.
But NZ Energy & Environment Business Alert's editors say much will depend on the share price, with Forsyth Barr saying the yield is “impressive and cannot be ignored.” The brokers put Genesis as an outperform rating if the final offer price is set at $1.54 or below. At $1.55 or above, they give it a neutral rating. The price range set for the offer is $1.35 to $1.65. For investors who like to balance risk a mix of Meridian and Genesis shares might make sense considering the two companies strengths and weaknesses.
The editors conclude in the long-term all the power utilities are facing the challenge of new technologies, the risk of customers turning into small scale generators and this with other uncertainties leaving the future shape of the market as a matter of speculation. Behind closed doors some longer term thinkers are starting to look into the future and wonder whether there is room in NZ for four major power utility companies.